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Fernandez Rodrik (1991) - Resistance To Reform Status Quo Bias In The Presence Of Individual Specific Uncertainty (view source)
Revision as of 19:14, 29 September 2020
, 19:14, 29 September 2020no edit summary
{{Article
|Has page=Fernandez Rodrik (1991) - Resistance To Reform Status Quo Bias In The Presence Of Individual Specific Uncertainty
|Has bibtex key=
|Has article title=Resistance To Reform Status Quo Bias In The Presence Of Individual Specific Uncertainty
|Has author=Fernandez Rodrik
|Has year=1991
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|In volume=
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*This page is referenced in [[BPP Field Exam Papers]]
==The Model==
===Summary===
The paper studies the choice of workers to invest in changing sectors. Part of their costs of changing sectors is fixed and known. The other part is private and unknown: Ex-ante, workers only know the distribution of types but not their own location within the distribution. As such, they act as if their own cost is the mean of the distribution.
In these circumstances, situations may arise in which a majority of workers oppose legislation that would require them to change sectors (such as trade liberalization, the motivating example of this paper) and instead favor the status quo. However should the legislation pass anyway, the workers would find out where they stand in the distribution. Some portion of workers who changed would then realize that the new legislation is actually better for them than the old status quo and would therefore resist efforts to repeal the law and revert to the old status quo.
Other situations may arise in which a majority of workers supports a similar piece of legislation because of an attractive mean. However upon learning their personal costs, a fraction of the voters who changed industries realizes that they may have preferred the status quo.
===Details===
There is a two sector perfectly competitive economy, where the sectors produce goods <math>X\,</math> and <math>Y\,</math> respectively. Both sectors use one factor, labour <math>L\,</math>, and have constant returns to scale.
where <math>a_j > 0, j \in \{x,y\}\,</math>
The cost of relocating between sectors for labour is made up of <math>\theta\,</math>, a general cost, and <math>c_j\,</math>, a sector specific entry cost. <math>c_j\,</math> is unknown and drawn from <math>f(c)\,</math>, which is known. The switching sequence is that workers must expend <math>\theta\,</math> in order to decide whether to switch, and if they do they then incur <math>c_j\,</math>.
The paper then shows that there exists a <math>c_i\,</math> that satifies the condition above, and assuming the functional form above it notes that there are parameter values for which this is true (e.g. <math>a_y = \theta = 1, \tilde{c} = 2, \gamma = 0.5\,</math>).
===Dynamic considerations===
