Dokument

Summary:
When countries need to implement costly economic policy reforms, these often imply uncertainties about their effectiveness for the home country and their spillovers to other countries. We develop a model to show that under these circumstances countries implement too few or too many policy reforms. From a social perspective, too many reforms follow if the spillover effects of reforms become sufficiently uncertain. Since centralization of policies to correct ineffcient policies is often not possible, we look for alternative instruments that can restore the effcient level of reforms. We compare subsidizing reform efforts with insuring against bad outcomes, and argue that subsidies are advanta- geous in terms of requiring less information for implementation.

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