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Democracy, populism, and (un)bounded rationality

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  • Binswanger, Johannes
  • Prüfer, Jens

Abstract

In this paper we aim to understand how bounded rationality affects performance of democratic institutions. We consider policy choice in a representative democracy when voters do not fully anticipate a politician's strategic behavior to manipulate his reelection chances. We find that this limited strategic sophistication affects policy choice in a fundamental way. Under perfect sophistication, a politician does not make any use of his private information but completely panders to voters' opinions. In contrast, under limited sophistication, a politician makes some use of private information and panders only partially. Limited sophistication crucially determines how welfare under representative democracy compares to welfare under alternative political institutions such as direct democracy or governance by experts. We find that, under limited strategic sophistication, representative democracy is preferable to the other institutions from an ex ante perspective.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 28 (2012)
Issue (Month): 3 ()
Pages: 358-372

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Handle: RePEc:eee:poleco:v:28:y:2012:i:3:p:358-372

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Web page: http://www.elsevier.com/locate/inca/505544

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Keywords: Strategic sophistication; Democracy; Populism; Sophistication-k beliefs; Accountability; Experts;

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Cited by:
  1. Gabriele Gratton, 2013. "Pandering and Electoral Competition," Discussion Papers 2012-22B, School of Economics, The University of New South Wales.
  2. Binswanger, Johannes & Prüfer, Jens, 2012. "Democracy, populism, and (un)bounded rationality," European Journal of Political Economy, Elsevier, vol. 28(3), pages 358-372.
  3. Schnellenbach, Jan & Schubert, Christian, 2014. "Behavioral public choice: A survey," Freiburg Discussion Papers on Constitutional Economics 14/03, Walter Eucken Institut e.V..

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