Uncertainty, informational spillovers and policy reform: A gravity model approach

- Uncertainty about outcome of reforms can hinder their implementation.
- We present a model of reforms with informational spillovers among countries.
- We test this model's predictions on a sample of post-communist countries.
- We find evidence of informational spillovers for political and economic reform.
- Spillovers appear particularly important for political changes.

Reforms often occur in waves, seemingly cascading from country to country. We argue that such reform waves can be driven by informational spillovers: uncertainty about the outcome of reform is reduced by learning from the experience of similar countries. We motivate this hypothesis with a simple theoretical model of informational spillovers and learning, and then test it empirically using an approach inspired by the gravity model. We find evidence of informational spillovers both with respect to both political and economic liberalization. While the previous literature has focused only on economic reform, we find that the spillovers are particularly important for political changes.