The Political Economy of Policy Instrument Choice: Theory and Evidence from Agricultural and Food Policies

Abstract

We study the political economy of instrument choice with an application to agricultural and food policies. We present stylized facts on the choice of policy instruments and develop a political economy theory of instrument choice. The key predictions of the model suggest a rational explanation of instrument choice patterns, based on the trade-off between transaction costs and distortions of the policies, and internal and external political constraints. Our empirical analysis supports the main predictions of the theoretical model. The shift from distortionary to less distortionary instruments is positively influenced by institutional development, a country’s net trade status, and the GATT/WTO framework.