Placebo Reforms
American Economic Review · 2013 · Volume 103 · Issue 4
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.
Keywords
Positive Analysis of Policy-Making and Implementation, Search, Learning, Information and Knowledge, Communication, Belief
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