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Abstract:

Development Discussion Paper
The Perverse Consequences of Policy Restrictions in the Presence of Asymmetric Information
Rafael Hortala-Vallve, Valentino Larcinese and Stephanie Rickard December 2013
Paper No' EOPP 048:
Full Paper (pdf)

Institutions can limit governments' policy options. Such restrictions are usually commended as solutions to time inconsistency problems or coordination failures. However, policy constraints can have important drawbacks and these disadvantages have generally been overlooked to date. When institutional constraints tie the governments' hands, citizens have fewer incentives to be informed about politics and participate in collective decision making. In effect, policy restrictions lower the private returns from political information. A fiscal policy restriction, for example, may decrease redistribution by lowering poorer voters' acquisition of political information. We find support for our prediction in a controlled laboratory experiment.