Can market failure cause political failure?

Aney, Madhav S., Ghatak, Maitreesh and Morelli, Massimo (2011) Can market failure cause political failure? Economic Organisation and Public Policy Discussion Papers, EOPP 029. The London School of Economics and Political Science, Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

We study how inefficiencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, where agents are endowed heterogeneously with wealth and talent. In our model, market failure due to unobservability of talent endogenously creates a class structure that affects voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.

Item Type:	Monograph (Technical Report)
Official URL:	http://sticerd.lse.ac.uk/
Additional Information:	© 2011 The Authors
Library of Congress subject classification:	J Political Science > JA Political science (General)
Sets:	Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Identification Number:	EOPP 029
Date Deposited:	21 Jul 2014 09:22
URL:	http://eprints.lse.ac.uk/58038/

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