The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects

Ernesto Dal Bó, Pedro Dal Bó and Erik Eyster

No 22916, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Although most of the political-economy literature blames inefficient policies on institutions or politicians' motives to supply bad policy, voters may themselves be partially responsible by demanding bad policy. In this paper, we posit that voters may systematically err when assessing potential changes in policy by underappreciating how new policies lead to new equilibrium behavior. This biases voters towards policy changes that create direct benefits—welfare would rise if behavior were held constant—even if these policies lower welfare because people adjust behavior. 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 negative direct effects, would help them to overcome social dilemmas and thereby increase welfare; conversely, subjects 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 affect other people's behavior, and that these mistaken beliefs exert a causal effect on the demand for bad policy.

JEL-codes: D02 D7 H2 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-ltv and nep-pol
Note: POL
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Published as Ernesto Dal Bó & Pedro Dal Bó & Erik Eyster, 2018. "The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 964-998.

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Journal Article: The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects (2018)
Working Paper: The demand for bad policy when voters underappreciate equilibrium effects (2018)
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