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General Equilibrium Effects and Voting into a Crisis

Author

Listed:
  • Gersbach, Hans
  • Beilharz, Hans-Jörg

Abstract

We show that in democracies insufficient recognition of general equilibrium effects can lead to a crisis. We consider a two-sector economy in which a majoritarian political process determines governmental regulation in one sector: a minimum nominal wage. If voters recognize general equilibrium feedbacks, workers across sectors form a majority and will favour market-clearing wages. If voters only take into account direct effects in the regulated sector, workers in the other sector are willing to vote for wage rises in each period since they also reckon with higher real wages for themselves. The political process leads to constantly rising unemployment and tax rates. The resulting crisis may trigger new insights into economic relationships on the part of the voters and may reverse bad times.

Suggested Citation

  • Gersbach, Hans & Beilharz, Hans-Jörg, 2004. "General Equilibrium Effects and Voting into a Crisis," CEPR Discussion Papers 4454, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4454
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    Citations

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    Cited by:

    1. repec:zbw:rwidps:0035 is not listed on IDEAS
    2. Ernesto Dal Bó & Pedro Dal Bó & Erik Eyster, 2018. "The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 964-998.
    3. Axel Dreher & Lars-H.R. Siemers, 2003. "The Intriguing Nexus Between Corruption and Capital Account Restrictions," Development and Comp Systems 0306004, University Library of Munich, Germany, revised 07 Jul 2005.
    4. Lars Siemers & Axel Dreher, 2005. "The Intriguing Nexus between Corruption and Capital Account Restrictions," RWI Discussion Papers 0035, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
    5. Henning, Christian H. C. A., 2015. "Modeling and evaluation of political processes: A new quantitative approach," Working Papers of Agricultural Policy WP2015-01, University of Kiel, Department of Agricultural Economics, Chair of Agricultural Policy.
    6. Ivo Bischoff & Lars-H. Siemers, 2013. "Biased beliefs and retrospective voting: why democracies choose mediocre policies," Public Choice, Springer, vol. 156(1), pages 163-180, July.
    7. Henning, Christian & Hedtrich, Johannes & Sene, Ligane, 2018. "Assessing Policy Failure in a General Political Equilibrium Framework: Derivation and application of a new CGPE-approach," Conference papers 332976, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

    More about this item

    Keywords

    Democracy; Unemployment; Crises; Awareness of general equilibirum effects; rise and fall of market distortions;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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