Policy Persistence

Conventional wisdom in political economy warns that once an economic policy is introduced, it is likely to persist. Even when its original rationale is no longer applicable or has been proven invalid, a policy will prove hard to remove. Empirical support for this position abounds. In both developed and developing countries, many policies appear remarkably resilient. In the United States, farm programs designed to provide support for impoverished farmers remain long after their beneficiaries have become far wealthier than the taxpayers who support them (Gordon C. Rausser, 1992). In developing countries, tariff programs to help import-substituting industries remain in place long after such a development strategy has been discredited (Anne Krueger, 1993). Worldwide, preferential policies designed to provide “temporary” assistance to ethnic groups persist well beyond their intended time limit (Thomas Sowell, 1990). Why do policies tend to persist in this way? The standard explanation is that interest groups representing net beneficiaries form to defend policies, so that even when their public-interest justification disappears, there is political pressure to maintain them. In this way, the introduction of a policy sets up a system of interestgroup politics which then dominates political decision-taking. Support for this position is garnered from the obvious historical importance of interest groups in the maintenance of many resilient policies. Unfortunately, this “explanation” is seriously incomplete. In any political system, interest groups will form in response to economic and political incentives. If, say, the agricultural sector has the capacity and incentives to organize an interest group to successfully lobby to maintain farm subsidies, then it would presumably have the capacity and incentives to introduce such subsidies were they not already in place. This being the case, the subsidies would be operative irrespective of whether they were introduced in the past. The prior introduction of the subsidies cannot then be held responsible for their current presence. The standard explanation simply fails to answer the key question: what is the mechanism by which the introduction of the policy alters incentives in the political process in favor of the new status quo? In this paper, we consider one such mechanism. When an economic policy is introduced, agents will often respond by undertaking actions in order to benefit from it. These actions increase their willingness to pay for the policy in the future. This extra willingness to pay will be translated into political pressure to retain the policy and this means it is more likely to be operative in the future. We present a simple dynamic model which illustrates this phenomenon. The model combines an agency style model of political competition of the type pioneered by Robert Barro (1973) and John Ferejohn (1986), with a lobbying model of the form made popular by the recent work of Gene M. Grossman and Elhanan Helpman (1994). We use the model to point out that policy persistence may give rise to political failure, in the sense that the policy sequence emerging in political equilibrium can be Pareto dominated. Political failure arises because voters forgo support for policies which provide temporary efficiency benefits, anticipating that they will persist once they have been implemented. S. Lael Brainard and Thierry Verdier (1994) explore this mechanism as an explanation of the persistence of protection to declining industries. They argue that if protection is granted in * Coate: Department of Economics, Cornell University, Ithaca, NY 14853; Morris: Cowles Foundation, Yale University, 30 Hillhouse Avenue, New Haven, CT 06511. We thank two anonymous referees, Avinash Dixit, and seminar participants at the University of Pennsylvania, Carnegie Mellon University, and Queen’s University for valuable comments. 1 This mechanism is also discussed in Dani Rodrik (1991). He argues that the probability that a policy reform is kept in place in the future will depend positively on the responsiveness of private investment to the reform when it