DP15136 Equilibrium Reforms and Endogenous Complexity

Author(s): Dana Foarta, Massimo Morelli
Publication Date: August 2020
Keyword(s): bureaucracy, Checks and balances, competence, Incremental Reforms, Information, interest groups, Politicians, Regulatory Complexity
JEL(s): D73, G28, H83, L51
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15136

Decision makers called to evaluate and approve a reform, proposed by an interest group, a politician, or a bureaucracy, suffer from a double asymmetric information problem: about the competence of the proposer and the consequences of the proposal. Moreover, the ability of decision makers to evaluate proposals depends on the complexity of the legislative environment, itself a product of past reforms. We model the strategic interaction between reformers and decision makers as a function of legislative complexity, and study the dynamics of endogenous complexity and stability of reforms. Complexication-simplication cycles can occur on the equilibrium path, and expected long-run complexity may be higher when competence of reform proposers is lower. The results apply to regulatory reforms, legislative politics, and institutional design.