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This paper presents a simple model of government reputation which captures two characteristics of policy outcomes in less developed countries: governments which betray public trust do so erratically, and, after a betrayal, public trust is regained only gradually. ∗ This paper was formerly titled “Randomly Bad Government. ” The author has benefited greatly from discussions with Andrew Atkeson, V.V. Chari, Harold Cole, Patrick Kehoe, and Narayana Kocherlakota, and from the research assistance of Aleh Tsyvinski. The views expressed herein are the those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1.
Christopher Phelan (Mon,) studied this question.