Leaping into the dark: A model of policy gambles

Kartik Anand, Prasanna Gai and Philipp J. König

Journal of Comparative Economics, 2023, vol. 51, issue 2, 457-476

Abstract: We examine why rational voters support risky “policy gambles” over a safe status quo, even when such policies are detrimental to welfare. In a model of electoral competition, investors finance domestic projects in exchange for a stake in future output, while voters receive the remaining output. Government policy influences the riskiness of projects’ output. However, when investors invest, the incumbent cannot pre-commit to retain the status quo policy into the future. Instead, future policy is determined subsequently in an election where voters can increase their expected output by voting for policy gambles. Our analysis highlights how investors’ self-fulfilling beliefs interact with the distribution of output in abandoning the status quo. We argue that institutions that foster political consensus can eliminate the gamble equilibrium and raise welfare.

Keywords: Policy uncertainty; Electoral competition; Multiple equilibria; Political consensus (search for similar items in EconPapers)
JEL-codes: D72 D78 P16 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:51:y:2023:i:2:p:457-476

DOI: 10.1016/j.jce.2022.12.001

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