Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences

Fausto Panunzi, Nicola Pavoni and Guido Tabellini

No 8539, CESifo Working Paper Series from CESifo

Abstract: This paper studies electoral competition over redistributive taxes between a safe incumbent and a risky opponent. As in prospect theory, economically disappointed voters become risk lovers, and hence are attracted by the more risky candidate. We show that, after a large adverse economic shock, the equilibrium can display policy divergence: the intrinsically more risky candidate proposes lower taxes and is supported by a coalition of very rich and very disappointed voters, while the safe candidate proposes higher taxes. This can explain why new populist parties are often supported by economically dissatisfied voters and yet they run on economic policy platforms of low redistribution. We show that survey data on the German SOEP are consistent with our theoretical predictions on voters’ behavior.

Keywords: populism; prospect theory; behavioral political economics (search for similar items in EconPapers)
JEL-codes: D70 D90 H00 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cdm, nep-pol and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences (2020)
Working Paper: Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences (2020)
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