The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects

Ernesto Dal Bó, Pedro Dal Bó and Erik Eyster

The Review of Economic Studies, 2018, vol. 85, issue 2, 964-998

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.

Keywords: Voting; Reform; Political failure; Endogenous policy; Experiment (search for similar items in EconPapers)
JEL-codes: C9 D7 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (64)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdx031 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The demand for bad policy when voters underappreciate equilibrium effects (2018)
Working Paper: The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:2:p:964-998.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().