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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 paper, we posit that voters may systematically err when assessing potential changes in policy by underappreciating how new policies lead to new equilibrium behavior. This biases voters towards policy changes that create direct benefits - welfare would rise if behavior were held constant - even if those reforms ultimately reduce welfare because people adjust behavior. 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 behavior 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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    File URL: http://eprints.lse.ac.uk/74455/
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    1. The demand for bad policy when voters underappreciate equilibrium effects
      by maximorossi in NEP-LTV blog on 2019-05-14 14:28:31

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    2. 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.
    3. Francesco Drago & Roberto Galbiati & Francesco Sobbrio, 2017. "The Political Cost of Being Soft on Crime: Evidence from a Natural Experiment," CESifo Working Paper Series 6826, CESifo.
    4. Persson, Emil & Tinghög, Gustav, 2020. "Opportunity cost neglect in public policy," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 301-312.
    5. Gallier, Carlo, 2020. "Democracy and compliance in public goods games," European Economic Review, Elsevier, vol. 121(C).
    6. 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).
    7. 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.
    8. 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).
    9. 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.

    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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