Theories of “bad policy”

Abstract

Recent growth theory fails to provide a convincing account of underdevelopment in terms of economic “fundamentals”. As a result, many accounts cite “bad” government policy (including the failure to support appropriate institutions) as a causal factor behind stagnation. Yet this perspective is hard to understand from the viewpoint of welfare economics. This paper studies theories of endogenous policy which can possibly account for such bad policy. I stress three (interrelated) general intuitions about the causes of bad policy which apply, irrespective of the type of political regime: (1) inability to use transfers to separate efficiency and distribution, (2) inability to commit, (3) the close connection between development and changes in the distribution of political power. I particularly stress the ability (or inability) of these theories to explain cross country differences.

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