The demand for bad policy when voters underappreciate equilibrium effects

Dal Bó, Ernesto, Dal Bó, Pedro and Eyster, Erik (2018) The demand for bad policy when voters underappreciate equilibrium effects. Review of Economic Studies, 85 (2). 964 - 998. ISSN 0034-6527

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Abstract

Most of the political economy literature blames inefficient policies on institutions or politicians’ motives to supply bad policy, but voters may themselves be partially responsible by demanding bad policy. In this article, we posit that voters may systematically err when assessing potential changes in policy by underappreciating how new policies lead to new equilibrium behaviour. This biases voters towards policy changes that create direct benefits—welfare would rise if behaviour were held constant—even if those reforms ultimately reduce welfare because people adjust behaviour. Conversely, voters are biased against policies that impose direct costs even if they induce larger indirect benefits. Using a lab experiment, we find that a majority of subjects vote against policies that, while inflicting direct costs, would help them to overcome social dilemmas and thereby increase welfare. Subjects also support policies that, while producing direct benefits, create social dilemmas and ultimately hurt welfare. Both mistakes arise because subjects fail to fully anticipate the equilibrium effects of new policies. More precisely, we establish that subjects systematically underappreciate the extent to which policy changes will affect the behaviour of other people, and that these mistaken beliefs exert a causal effect on the demand for bad policy.

Item Type:	Article
Official URL:	http://www.restud.com/
Additional Information:	© 2017 The Authors
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory J Political Science > JA Political science (General)
JEL classification:	C - Mathematical and Quantitative Methods > C9 - Design of Experiments D - Microeconomics > D7 - Analysis of Collective Decision-Making
Date Deposited:	05 May 2017 09:14
Last Modified:	11 Dec 2024 21:30
Funders:	European Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/74455

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