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Only limited progress has been made in modeling of dynamic process of institutional change, therefore, limiting the concerned policy options. It has been identified that innovation, honesty, investment, labour training and saving can lead to externalities mediated by
- change in beliefs information
- effects on technology of the individual agents
- changes in the set of markets that exists
- changes in the size of markets and
- changes in search costs
There externalities affect the rewards to activities and can lead to existence or multiple equilibria - each with different reward structure. In fact, with a view to policy decision, analyzing problems relating to markets, market models are more relevant than usual game theoretic analysis.
Q. Example on Uncertainty and the policy process? For example, if it is expected that current government will be replaced in upcoming election, and the next government will be
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‘…Policies that promote residential mobility and increase the knowledge of the consumer-voter will improve the allocation of government expenditures in the same sense that mobility
A change in the legal statute may be able to force an equilibrium if it leads to a new equilibrium which implies some revised belief which sustains the equilibrium. Tirole (1996)
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