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American Economic Review: Vol. 103 No. 4 (June 2013)

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Placebo Reforms

Article Citation

Spiegler, Ran. 2013. "Placebo Reforms." American Economic Review, 103(4): 1490-1506.

DOI: 10.1257/aer.103.4.1490

Abstract

I study a dynamic model of strategic reform decisions that potentially affect the stochastic evolution of a publicly observed economic variable. Policy makers maximize their evaluation by a boundedly rational public. Specifically, the public follows a rule that attributes recent changes to the most recent intervention. I analyze subgame perfect equilibrium in this model when the economic variable follows a linear growth trend with noise. Equilibrium is essentially unique and stationary, bearing a subtle formal relation to optimal search models. Policy makers tend to act during crises, display risk aversion conditional on acting, and prefer interventions that induce permanent noise.

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Authors

Spiegler, Ran (Tel Aviv U and U College London)

JEL Classifications

D78: Positive Analysis of Policy-Making and Implementation
D83: Search; Learning; Information and Knowledge; Communication; Belief


American Economic Review


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