Regulation in a Political Economy: explaining limited commitment and the ratchet e ect
نویسنده
چکیده
This paper o ers an explanation why governments have limited commitment and are susceptible to the ratchet e ect. It analyzes a two period model in which a government with full commitment regulates a rm. Each period is predated by an election. If contracts of previous governments tie newly elected governments, governments end up being unable to resist renegotiation. If previous contracts do not bind new governments and taxation has a crowding-out e ect, a ratchet e ect occurs which is similar, but not identical to the standard ratchet e ect which is due to intertemporal non-commitment. Surprisingly, social welfare may be higher
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