IDEAS home Printed from
   My bibliography  Save this article

The Economics Of Illusion


  • George A. Akerlof


When individuals choose not only goods, but also how to process information, there is a bias: people tend to process information so that they feel good about themselves. This bias is particularly important in voting behavior, where agents have almost no individual effect on public choice outcomes, and therefore almost no incentive for unbiased use of information. Two examples are given. In one example, an adaptation of the classic overdepletion problem, the public chooses not to counteract externalities by appropriate tax policy. In the second example public policy follows the choices of experts, contrary to the interest of the public. Copyright 1989 Blackwell Publishers Ltd..

Suggested Citation

  • George A. Akerlof, 1989. "The Economics Of Illusion," Economics and Politics, Wiley Blackwell, vol. 1(1), pages 1-15, March.
  • Handle: RePEc:bla:ecopol:v:1:y:1989:i:1:p:1-15

    Download full text from publisher

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Ulrich Kaiser, 2000. "New Technologies And The Demand For Heterogeneous Labor: Firm-Level Evidence For The German Business-Related Service Sector," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 9(5), pages 465-486.
    2. Li, Quan, 2009. "Outlier, Measurement, and the Democracy-FDI Controversy," Quarterly Journal of Political Science, now publishers, vol. 4(2), pages 167-181, July.
    3. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
    4. Jensen, Nathan M. & Rosas, Guillermo, 2007. "Foreign Direct Investment and Income Inequality in Mexico, 1990 2000," International Organization, Cambridge University Press, vol. 61(03), pages 467-487, July.
    5. repec:taf:rjapxx:v:9:y:2004:i:3:p:348-369 is not listed on IDEAS
    6. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    7. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, June.
    8. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, World Bank Group, vol. 11(1), pages 33-57, January.
    9. Christopher Zorn, 2001. "Estimating between‐ and within‐cluster covariate effects, with an application to models of international disputes," International Interactions, Taylor & Francis Journals, vol. 27(4), pages 433-445, June.
    10. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, vol. 10(3), pages 565-591, September.
    11. Leamer, Edward E. & Maul, Hugo & Rodriguez, Sergio & Schott, Peter K., 1999. "Does natural resource abundance increase Latin American income inequality?," Journal of Development Economics, Elsevier, vol. 59(1), pages 3-42, June.
    12. Chen, Zhihong & Ge, Ying & Lai, Huiwen, 2011. "Foreign Direct Investment and Wage Inequality: Evidence from China," World Development, Elsevier, vol. 39(8), pages 1322-1332, August.
    13. Pan-Long Tsai, 1995. "Foreign direct investment and income inequality: Further evidence," World Development, Elsevier, vol. 23(3), pages 469-483, March.
    14. Gordon H. Hanson & Ann Harrison, 1999. "Trade Liberalization and Wage Inequality in Mexico," ILR Review, Cornell University, ILR School, vol. 52(2), pages 271-288, January.
    15. Cédric Durand, 2007. "Externalities from foreign direct investment in the Mexican retailing sector," Cambridge Journal of Economics, Oxford University Press, vol. 31(3), pages 393-411, May.
    16. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
    17. Robert G. Blanton & Shannon Lindsey Blanton, 2015. "Is Foreign Direct Investment "Gender Blind"? Women's Rights as a Determinant of US FDI," Feminist Economics, Taylor & Francis Journals, vol. 21(4), pages 61-88, October.
    18. Anderson, Edward, 2005. "Openness and inequality in developing countries: A review of theory and recent evidence," World Development, Elsevier, vol. 33(7), pages 1045-1063, July.
    19. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 90(2), pages 231-242.
    20. Florence Jaumotte & Subir Lall & Chris Papageorgiou, 2013. "Rising Income Inequality: Technology, or Trade and Financial Globalization?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(2), pages 271-309, June.
    21. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, vol. 10(3), pages 565-591, September.
    22. repec:cup:apsrev:v:91:y:1997:i:03:p:531-551_21 is not listed on IDEAS
    23. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 45(1), pages 39-82, March.
    24. Laís ABRAMO & Maria Elena VALENZUELA, 2005. "Women's labour force participation rates in Latin America," International Labour Review, International Labour Organization, vol. 144(4), pages 369-400, December.
    25. Lipsey, Robert E. & Sjoholm, Fredrik, 2004. "Foreign direct investment, education and wages in Indonesian manufacturing," Journal of Development Economics, Elsevier, vol. 73(1), pages 415-422, February.
    26. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2010. "Informal self-employment and macroeconomic fluctuations," Journal of Development Economics, Elsevier, vol. 91(2), pages 211-226, March.
    27. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
    28. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September.
    29. Meschi, Elena & Vivarelli, Marco, 2009. "Trade and Income Inequality in Developing Countries," World Development, Elsevier, vol. 37(2), pages 287-302, February.
    30. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," LIS Working papers 496, LIS Cross-National Data Center in Luxembourg.
    31. Rosser, J. Jr. & Rosser, Marina V. & Ahmed, Ehsan, 2000. "Income Inequality and the Informal Economy in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 156-171, March.
    32. Changkyu Choi, 2006. "Does foreign direct investment affect domestic income inequality?," Applied Economics Letters, Taylor & Francis Journals, vol. 13(12), pages 811-814.
    33. Pablo M. Pinto & Santiago M. Pinto, 2008. "The Politics Of Investment Partisanship: And The Sectoral Allocation Of Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 20(2), pages 216-254, June.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Johansson-Stenman, Olof, 2008. "Mad cows, terrorism and junk food: Should public policy reflect perceived or objective risks?," Journal of Health Economics, Elsevier, vol. 27(2), pages 234-248, March.
    2. Hoff, Karla & Stiglitz, Joseph E., 2016. "Striving for balance in economics: Towards a theory of the social determination of behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PB), pages 25-57.
    3. Mikael Elinder, 2012. "Correcting mistakes: cognitive dissonance and political attitudes in Sweden and the United States," Public Choice, Springer, vol. 153(1), pages 235-249, October.
    4. Martinelli, Cesar, 2006. "Would rational voters acquire costly information?," Journal of Economic Theory, Elsevier, vol. 129(1), pages 225-251, July.
    5. Caplan, Bryan, 2003. "The idea trap: the political economy of growth divergence," European Journal of Political Economy, Elsevier, vol. 19(2), pages 183-203, June.
    6. Schnellenbach, Jan & Schubert, Christian, 2015. "Behavioral political economy: A survey," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 395-417.
    7. Wohlgemuth, Michael, 2004. "The Communicative Character of Capitalistic Competition: A Hayekian response to the Habermasian challenge," Freiburg Discussion Papers on Constitutional Economics 04/1, Walter Eucken Institut e.V..
    8. Michael Wohlgemuth, 2011. "Is there a Paradox of a Hayekian Paternalist?," Papers on Economics and Evolution 2011-22, Philipps University Marburg, Department of Geography.
    9. Oxoby, Robert J., 2003. "Attitudes and allocations: status, cognitive dissonance, and the manipulation of attitudes," Journal of Economic Behavior & Organization, Elsevier, vol. 52(3), pages 365-385, November.
    10. Hillman, Arye L., 2010. "Expressive behavior in economics and politics," European Journal of Political Economy, Elsevier, vol. 26(4), pages 403-418, December.
    11. Hamlin, Alan & Jennings, Colin, 2011. "Expressive Political Behaviour: Foundations, Scope and Implications," British Journal of Political Science, Cambridge University Press, vol. 41(03), pages 645-670, July.
    12. Schnellenbach, Jan & Schubert, Christian, 2014. "Behavioral public choice: A survey," Freiburg Discussion Papers on Constitutional Economics 14/03, Walter Eucken Institut e.V..

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecopol:v:1:y:1989:i:1:p:1-15. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.