Regret theory and policy reform∗

Abstract

This paper offers an explanation of policy reforms undertaken in times of an economic crisis. Our explanation does not depend either on conflicts of interests between different socio-economic groups, or on the informational imperfection about the effectiveness of the current policy regime. The single decision maker in our model experiences regrets when the uncertain reform outcome is worse than the status quo. We show that an economic crisis which reduces the status-quo income makes the regret-experiencing decision maker more eager to undertake reforms in times of an economic crisis, despite the higher utility costs of adjustments.

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