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The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects by Ernesto Dal Bó; Pedro Dal Bó; Erik Eyster is a Economics, Econometrics and Finance article available to read on EtoBox.

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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

Who reads The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects?

Author

Ernesto Dal Bó; Pedro Dal Bó; Erik Eyster

Publisher

Oxford University Press (OUP)

Published

2017

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)