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The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects

Author

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  • Ernesto Dal Bó
  • Pedro Dal Bó
  • Erik Eyster

Abstract

Most of the political economy literature blames inefficient policies on institutions or politicians’ motives to supply bad policy, but voters may themselves be partially responsible by demanding bad policy. In this article, we posit that voters may systematically err when assessing potential changes in policy by underappreciating how new policies lead to new equilibrium behaviour. This biases voters towards policy changes that create direct benefits—welfare would rise if behaviour were held constant—even if those reforms ultimately reduce welfare because people adjust behaviour. Conversely, voters are biased against policies that impose direct costs even if they induce larger indirect benefits. Using a lab experiment, we find that a majority of subjects vote against policies that, while inflicting direct costs, would help them to overcome social dilemmas and thereby increase welfare. Subjects also support policies that, while producing direct benefits, create social dilemmas and ultimately hurt welfare. Both mistakes arise because subjects fail to fully anticipate the equilibrium effects of new policies. More precisely, we establish that subjects systematically underappreciate the extent to which policy changes will affect the behaviour of other people, and that these mistaken beliefs exert a causal effect on the demand for bad policy.

Suggested Citation

  • Ernesto Dal Bó & Pedro Dal Bó & Erik Eyster, 2018. "The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 964-998.
  • Handle: RePEc:oup:restud:v:85:y:2018:i:2:p:964-998.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx031
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    Cited by:

    1. Persson, Emil & Tinghög, Gustav, 2020. "Opportunity cost neglect in public policy," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 301-312.
    2. Draca, Mirko & Schwarz, Carlo, 2019. "How Polarized are Citizens? Measuring Ideology from the Ground-Up," The Warwick Economics Research Paper Series (TWERPS) 1218, University of Warwick, Department of Economics.
    3. Drago, Francesco & Galbiati, Roberto & Sobbrio, Francesco, 2017. "The Political Cost of Being Soft on Crime: Evidence from a Natural Experiment," CEPR Discussion Papers 12097, C.E.P.R. Discussion Papers.
    4. Astrid Dannenberg & Corina Haita-Falah & Sonja Zitzelsberger, 2020. "Voting on the threat of exclusion in a public goods experiment," Experimental Economics, Springer;Economic Science Association, vol. 23(1), pages 84-109, March.
    5. Beheshtian, Arash & Richard Geddes, R. & Rouhani, Omid M. & Kockelman, Kara M. & Ockenfels, Axel & Cramton, Peter & Do, Wooseok, 2020. "Bringing the efficiency of electricity market mechanisms to multimodal mobility across congested transportation systems," Transportation Research Part A: Policy and Practice, Elsevier, vol. 131(C), pages 58-69.
    6. Dannenberg, Astrid & Gallier, Carlo, 2019. "The choice of institutions to solve cooperation problems: A survey of experimental research," ZEW Discussion Papers 19-021, ZEW - Leibniz Centre for European Economic Research.
    7. Benoit Crutzen & Dana Sisak & Otto Swank, 2020. "Left Behind Voters, Anti-Elitism and Popular Will," Tinbergen Institute Discussion Papers 20-055/VII, Tinbergen Institute.
    8. Draca, Mirko & Schwarz, Carlo, 2019. "How Polarized are Citizens? Measuring Ideology from the Ground-Up," CAGE Online Working Paper Series 432, Competitive Advantage in the Global Economy (CAGE).
    9. Astrid Dannenberg & Carlo Gallier, 2019. "The Choice of Institutions to Solve Cooperation Problems: A Survey of Experimental Research," MAGKS Papers on Economics 201911, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Gallier, Carlo, 2020. "Democracy and compliance in public goods games," European Economic Review, Elsevier, vol. 121(C).

    More about this item

    Keywords

    Voting; Reform; Political failure; Endogenous policy; Experiment;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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