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Alesina Drazen (1991) - Why Are Stabilizations Delayed (view source)
Revision as of 19:40, 20 June 2010
, 19:40, 20 June 2010→The Model
This is used to determine the optimum concession time <math>T_i\,</math> of a group with cost <math>\theta_i\,</math>, subject to:
*<math>\underline{\theta} > \alpha - \frac{1}{2}\,</math> : This prevents a groups optimum concession time from being infinite, as otherwise a group may prefer to wait indefinately, as the cost of living in the unstable economy and bearing half of the tax burden is less than the cost of being the loser.
*<math>F(\theta) = 1-H(T(\theta))\,</math> : as <math>T_i\,</math> is monotonic in \<math>\theta_i\,</math> this can (apparently) be derived.
*Ignoring the equilibria in which one group concedes immediately, as the paper wants to examine delay.
*Looking for a symmetric equilibria.
*Lemma 1 in the paper give <math>t_i'(\theta_i) < 0\,</math> : The optimal concession time is monotonically decreasing in <math>\theta_i\,</math>
As long as participants believe that someone may have a higher <math>\theta\,</math>, stabilization doesn't occur immediately. The key to the model is that there are multiple parties that do not know the other parties costs. Heterogeneity of costs is not sufficient; if costs are known stabilization occurs immediately.
==Why Do Some Countries Stabilize Sooner Than Others?==
