Alesina Drazen (1991) - Why Are Stabilizations Delayed

• This page is referenced in BPP Field Exam Papers

Reference(s)

Alesina, A. and A. Drazen (1991), Why are Stabilizations Delayed?, American Economic Review 81, 1170-1188. pdf

Abstract

When a stabilization has significant distributional implications (e.g., tax increases to eliminate a large budget deficit), socioeconomic groups may attempt to shift the burden of stabilization onto other groups. The process leading to stabilization becomes a "war of attrition," each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden. We solve for the expected time of stabilization in a model of "rational" delay and relate it to several political and economic variables. We motivate this approach and its results by comparison to historical and current episodes.