skip to content

Faculty of Economics

Journal Cover

Jain, S. and Majumdar, S.

State Capacity, Redistributive Compensation and the Political Economy of Economic Policy Reform

International Review of Economics & Finance

Vol. 42 pp. 462-473 (2020)

Abstract: If governments can compensate “losers” from large-scale economic reform, such as trade liberalization, by redistributing some of the “winners'” gains, then any potentially Pareto-improving reform should be implemented. However, in many economies, the state's capacity to identify and tax winners is limited. How do such limitations impact the adoption of reforms? We show that for reforms where the distribution of winners and losers is exogenously given, higher state capacity unambiguously helps the adoption of Pareto-improving reforms. However, for reforms which require individual investment decisions by potential winners, better state capacity may not always translate into higher political support for reform.

Keywords: Political Economy, Redistribution, Compensation, State Capacity

JEL Codes: D72, F15, O10, H26, P11, P26, P16

Publisher's Link:

Keynes Fund Project(s):
The Politics of Economic Reform: Redistributive Promises, Transfers to Special Interests, and the Dynamics of Public Support for Economic Policy Reform (JHLI)  

Papers and Publications

Recent Publications

Ambrus, A. and Elliott, M. Investments in Social Ties, Risk Sharing, and Inequality Review of Economic Studies [2021]

Huffman, D., Raymond, C. and Shvets, J. Persistent Overconfidence and Biased Memory: Evidence from Managers American Economic Review [2022]

Corsetti, G., Crowley, M. A. and Han, L. Invoicing and the Dynamics of Pricing-to-Market: Evidence from UK Export Prices around the Brexit Referendum Journal of International Economics [2022]

Ascari, G. and Haber, T. Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy The Economic Journal [2022]