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Alesina Drazen (1991) - Why Are Stabilizations Delayed (view source)
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{{Article
|Has page=Alesina Drazen (1991) - Why Are Stabilizations Delayed
|Has bibtex key=
|Has article title=Why Are Stabilizations Delayed
|Has author=Alesina Drazen
|Has year=1991
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|In volume=
|In number=
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*This page is referenced in [[BPP Field Exam Papers]]
[http://www.edegan.com/repository/Rui%20Notes%20on%20Alsina%20and%20Drazen.pdf Rui's Notes From Class]
==Reference(s)==
==The Model==
Until <math>t=0\,</math> the budget is balanced, with debt . At <math>b_0 \ge t=0\,</math>. At a shock hits reducing tax revenues, which implies with debt <math>t=b \ge 0\,</math> a shock hits reducing tax revenues. After <math>t=0\,</math> until stabilization, <math>(1-\gamma)\,</math> of government expenditure including interest payments is covered by issuing debt, and <math>\gamma\,</math> is covered by distortionary taxation, where <math>\gamma >0\,</math> but not fixed.
Denoting <math>g_0\,</math> as the level of expenditure, debt <math>b(t)\,</math> evolves according to:
<math>\underbrace{\frac{db}{dt}}_{\mbox{Change in debt}} = \overbrace{(1-\gamma)}^{\mbox{deficit}}\times\underbrace{[rb(t) + g_0]}_{\mbox{Total government spending}}\,</math>
Taxes before stabilization are therefore:
:<math>\underbrace{\tau(t) }_{\mbox{Taxes}} = \overbrace{\gamma}^{\mbox{Taxed percent}}\times\underbrace{(rb(t) +g_o)}_{\mbox{Total expenditures}}\,</math>
:<math>\therefore \tau(t) = \gamma r \bar{b}^{(1-\gamma)rt}\,</math>
A higher <math>\gamma\,</math> implies an earlier stabilization:
*A higher <math>\gamma\,</math> means more a higher proportion of expenditure, including interest payments, is covered by distortionary taxes
*There are two effects, and the first dominates:
**A higher <math>\gamma\,</math> gives a greater distortion for a given deficit which induces an earlier concession
**A higher <math>\gamma\,</math> means debt rises more slowly and hence distortions which induce concession grow slower
===Costs of Distortions===
===Income Dispersion===
If the utility loss is decreaing in income and if income is unobservable, then an a mean preserving spread in income the that keeps the expected minimum of the <math>y\,</math>'s constant will result in longer times until stabilization.
*If <math>\theta'(y) < 0\,</math> the poor lose the war, because the rich can hold out longer.
*This could be interpreted as the funds available for political lobbying.
==Extensions==
*With further shocks lead to one side immediately conceding following a shock
*Be extended to show that more political resources are needed as the war progresses
*Be interpretted interpreted as follows: <math>\theta\,</math> is the existance of institutions that make it relatively more difficult for opposing groups to stop reform
Note that reform does not necessarily directly follow a shock!
