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The hidden cost of raising voters’ expectations: Reference dependence and politicians’ credibility

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  • Grillo, Edoardo

Abstract

Two politicians compete to get elected. Each politician is characterized by a valence, which is unobservable to the electorate and can take one of two values: high or low. The representative voter prefers politicians with high valence, but random shocks may lead him to appoint a low-valence politician. Politicians make statements concerning their valence. If the voter is a standard expected utility maximizer, politicians’ statements lack any credibility and no information transmission takes place. By introducing reference dependence and loss aversion, we show that truthful communication is possible in equilibrium and we characterize the conditions under which it can arise. Intuitively, these behavioral biases introduce a cost of overstating one's valence as overstatements may shift the electorate's preferences toward better skilled opponents.

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  • Grillo, Edoardo, 2016. "The hidden cost of raising voters’ expectations: Reference dependence and politicians’ credibility," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 126-143.
    • Handle: RePEc:eee:jeborg:v:130:y:2016:i:c:p:126-143
    DOI: 10.1016/j.jebo.2016.07.008
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