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Markets vs. Politics, Correcting Erroneous Beliefs Differently

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Abstract

In the fields of social choice, public choice and political economics, the main difference between private and political choice is whether individual preferences are aggregated to make a decision. A much less studied difference is whether beliefs are aggregated to make a decision. In this paper, we argue that the need for aggregation creates different incentives for belief updates in private and political choice. We review contemporary theories of biased beliefs in politics: Bayesian misperceptions, behavioral anomalies, and rational irrationality. We examine assumptions and consequences of all the approaches vis-à-vis issues of common knowledge, stability, symmetry, and multiplicity of stable states. As a route for further analysis, we construct an evolutionary model including a coordination failure. Differences in learning dynamics make the political play of this baseline game Pareto-inferior to the private play.

Suggested Citation

  • Martin Gregor, 2007. "Markets vs. Politics, Correcting Erroneous Beliefs Differently," Working Papers IES 2007/21, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2007.
  • Handle: RePEc:fau:wpaper:wp2007_21
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    File URL: http://ies.fsv.cuni.cz/default/file/download/id/6428
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    1. Wadim Strielkowski, 2006. "People of the Road: the Role of Ethnic Origin in Migration Decisions. A Study of Slovak Roma Asylum-Seekers in the Czech Republic in 1998-2006," Working Papers IES 2006/32, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Dec 2006.
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    Keywords

    public choice; political economics; beliefs; learning;

    JEL classification:

    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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