Do this or do that? A model to prioritize reforms

Pré-publication, Document de travail: This paper aims to fill the methodological gap in development economics that until now there exists no quantitative tool that allows to prioritize reforms in a systematic nor optimal way. Following the recent debate on the issues Randomized Control Trials (RCTs) have with establishing external validity and general equilibrium effects, this paper proposes a micro-founded Growth Diagnostics framework to consider general equilibrium effects and prioritize policy prescriptions. Contrarily to Hausmann et al. (2005), we set up two continous-time Overlapping Generations (OLG) models to account for the different net-marginal valuations of various economic activities rigorously. We solve the household and planner problem to respectively obtain the private and social net-marginal valuations of economic activities via the corresponding Lagrange multipliers. With these in hand, we define the wedges in the net-marginal private and social valuations to set up a new planner problem (we call super policy maker problem), where the planner minimizes the sum of wedges. This final wrapping optimization problem allows to prioritize optimally economic reforms in a second-best framework, thus, to put it in the words of Rodrik (2010), to first diagnose before one prescribes the remedy.

Auteur(s)

Carmen Camacho, Hannes Tepper

Date de publication
  • 2023
Mots-clés JEL
O11 O21 O22
Mots-clés
  • Reform
  • Economic policy
  • Structural change
  • General equilibrium reform
Référence interne
  • PSE Working Papers n°2023-10
Pages
  • 35 p.
Version
  • 1