In Search of the Holy Grail: Policy Convergence, Experimentation and Economic Performance

Abstract

We consider a model of policy choice in which appropriate policies depend on a country's own circumstances, but the presence of a successful leader generates an informational externality and results in too little "policy experimentation." Corrupt governments are reined in while honest governments are disciplined inefficiently. Our model yields distinct predictions about the patterns of policy imitation, corruption, and economic performance as a function of a country's location vis-à-vis successful leaders. In particular, it predicts a U-shaped pattern in economic performance as we move away from the leader in the relevant space of characteristics: close neighbors should do very well, distant countries moderately well on average with considerable variance, and intermediate countries worst of all. An empirical test with the experience of postsocialist countries provides supportive results.

On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship

“…For a discussion of the interplay between learning and policy experimentation, see Mukand and Rodrik (2002). Furthermore, there may be cases where institutional reform would yield a clearcut advantage over tinkering so that…”

Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe

“…Countries mimic their neighbors' policies even when this is not the best solution for their economic situation (Mukand & Rodrik 2005). This mimicking behavior is also found in their (corporate) tax policy.…”

Semiparametric estimation and testing of smooth coefficient spatial autoregressive models

“…Existing theoretical and empirical work indicate that institutional development in one country affects that of its neighbors (Mukand & Rodrik, 2005), where the institutional diffusion may be driven, say, by lobbying of multinational corporations for the harmonization of the commercial law across countries, requirements for members of a trade pact to standardize regulations or even military conflicts (see Kelejian et al, 2013). The semiparametric model we propose is equipped to examine such institutional diffusions across space while also allowing for nonlinearities and heterogeneity in institutional spillovers.…”