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Hindsight biased policy evaluation

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  • Florian Schuett
  • Alexander K. Wagner

Abstract

Hindsight bias is a cognitive deficiency that leads people to overestimate ex post how predictable an event was. In this paper we develop a political-agency model in which voters are hindsight-biased and politicians differ in ability, defined as information concerning the optimal policy. When public information is not too accurate, low-ability politicians sometimes gamble on suboptimal policies: in an attempt to mimic the high-ability type, who has superior private information, they go against public information and choose a policy whose expected payoff to society is negative. We model hindsight bias as a memory imperfection that prevents voters from accessing their ex ante information about the state of the world. We show that the bias can act as a discipline device that reduces policy gambles and can therefore be welfare enhancing. Although it is well known that restrictions on information acquisition can be beneficial for a principal, our contribution is to show that a psychological bias can have such an effect.

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Paper provided by LERNA, University of Toulouse in its series LERNA Working Papers with number 08.08.252.

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Date of creation: Feb 2008
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Handle: RePEc:ler:wpaper:08.08.252

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