Quo Bias in the Presence of Individual Specific Uncertainty : Comment

Why do governments so often fail to adopt reforms that economists consider efficiency enhancing? This is the question addressed in an influential paper by Raquel Fernandez and Dani Rodrik (1991). They argue that one of the reasons is that individual winners and losers of reform can often not be identified beforehand. This individual specific uncertainty leads to a bias against reform. Before turning to their model, Fernandez and Rodrik illustrate their argument with an example. The example assumes that voters are risk neutral and that reforms need the support of a majority of the electorate. Fernandez and Rodrik first argue that individual specific (IS) uncertainty does not lead to a bias against reform as long as the electorate only gets to vote once. Their argument is easiest to explain with the help of Figure 1. The ISU set captures all reforms passed with IS uncertainty. The NO-ISU set captures all reforms passed without IS uncertainty. It can be seen that some reforms will be enacted with IS uncertainty although they would have been rejected without uncertainty. To see how this may happen suppose that a majority of voters will turn out to lose L from reform and a minority will turn out to gain G from reform. If voters know whether they win or lose for certain when they have to decide, reform will be rejected. If voters only know about the distribution of winners and losers in the population, reform will be passed as long as gains G are large relative to losses L. Figure 1 also shows reforms that will be enacted without IS uncertainty although they would have been rejected with uncertainty. A necessary condition for this to happen is that a majority will turn out to gain G from reform and a minority lose L. If voters know who wins and loses when they make their decision, reform will be accepted. If voters only know about the distribution of winners and losers, reform will be rejected as long as G is small relative to L. As reforms may be enacted with IS uncertainty but not without IS uncertainty and vice versa, Fernandez and Rodrik argue that IS uncertainty does not lead to a bias in favor of or against reform when the electorate only gets to vote once.