Political Risk Aversion

Date Added: Sep 2009
Format: PDF

This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. The author shows how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what one calls political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform.