A Note on the Determinacy Paradox: The Art of Policy Advice to Endogenous Government with Its Own Motivation

As increasing numbers of economic models endogenize government, we get more fruitful understanding about its policy determination. With policies endogenously determined, however, we confront the “determinacy paradox” that addresses the possible conflict between two traditional activities by economists: advising government “what should be done” vs. predicting “what government will do.” In this note I clarify the implication of the determinacy paradox and explore how to resolve the paradoxical result, focusing on asymmetric information and the government’s objective function. When we focus on the “possibility of existence” of advice, asymmetric information under uncertainty plays a key role in resolving the determinacy paradox. When we concentrate on the “acceptability” of normative advice, considering government's own objective becomes a crucial job. Unlike Basu (1997)’s skeptical result, when government behaves by some constraints as if its aim were maximizing social welfare, or when government and the economist share the similar objectives, giving advice to government can be a sensible activity, so that we can successfully overcome the weak form of the determinacy paradox.