Austen-Smith, DavidDziuda, WiolettaHarstad, BårdLoeper, Antoine2020-06-112020-06-112019-11Theoretical economics, 14(4), Pp. 1483-15341933-68371555-7561 (online)https://hdl.handle.net/10016/30605Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier to repeal than efficient instruments. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument.52eng© 2019 The Authors.Licensed under the Creative Commons Attribution-NonCommercial License 4.0.Atribución-NoComercial-SinDerivadas 3.0 EspañaDynamic gamesPolitical economyPolitical instrumentsBargainingresearch articleEconomíahttps://doi.org/10.3982/TE3329open access148341534Theoretical Economics14AR/0000024475