Political uncertainty and policy innovation

This paper provides an analysis of the interaction between policy experimentation and political incentives. In particular we ask: how well does a political system with elections work in separating selfish from benevolent politicians and providing innovative policies? and, how does the interaction between the democratic system and the incentives to innovate change as the information context becomes richer? Two contrasting forces in shaping political outcomes are identified. On the one hand the availability of external information improves the working of the political system but on the other hand it reduces the incentives to innovate. It is shown that, contrary to conventional wisdom, an increase in external information may reduce welfare.

Kotsogiannis, Christos and Robert Schwager (2001), Political uncertainty and policy innovation, Discussion Paper, Department of Economics, University of Exeter, Exeter