Saturday, January 17, 2015

Regime Uncertainty

There's too many men, too many people
Making too many problems
And not much love to go 'round
Can't you see, this is the land of confusion?
--Genesis

Regime uncertainty (Higgs, 1997) is the inability to accurately forecast the influence of government policies on property rights. When regime uncertainty is high, decision-makers will be more reluctant to invest in projects out of concern that their property might be appropriated. They are less confident about the outcomes of their projects. They put productivity improvements on hold.

Malinvestment is also possible as decision makers engage in projects meant to circumvent or cope with regime uncertainty. For example, general purpose, mobile assets might be substituted for more promising specific, immobile assets in order to increase flexibility in uncertain times (Williamson, 1991).

Elections, pending legislation, executive overreach, and doubts about future monetary policy are some factors that can influence degree of regime uncertainty.

References

Higgs, R, (1997). Regime uncertainty - Why the Great Depression lasted lasted so long and why prosperity resumed after the war. The Independent Review, 1(4): 561-590.

Williamson, O.E. (1991). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36: 269-296.

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