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The demand for bad policy when voters underappreciate equilibrium effects

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  • Dal Bó, Ernesto
  • Dal Bó, Pedro
  • Eyster, Erik

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

  • Dal Bó, Ernesto & Dal Bó, Pedro & Eyster, Erik, 2018. "The demand for bad policy when voters underappreciate equilibrium effects," LSE Research Online Documents on Economics 74455, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:74455
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    More about this item

    Keywords

    voting; reform; political failure; endogenous policy; experiment;
    All these keywords.

    JEL classification:

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

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