The Market As Prison? Firms’ Reactions to Public Policies

For politicians, markets can be a prison. Even though politicians may want to increase taxes or tighten regulation, they often feel constrained because they fear the negative reactions of markets and the consequential decrease in investment, growth and employment. And the “market’s reaction” has become ever more visible to politicians through financialization and the increasing importance of stock-market performance. In this paper, I consider firm behavior and analyze how public policies affect firms’ assessment of their economic prospects. While far-reaching policies can curb firm’s expectations and investment decisions, politicians have substantial room to move.