The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects / Ernesto Dal Bó, Pedro Dal Bó, Erik Eyster.

Format:

Book

Author/Creator:

Dal Bó, Ernesto.

Contributor:

National Bureau of Economic Research.

Dal Bó, Pedro.

Eyster, Erik.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22916.

NBER working paper series no. w22916

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

Although most of the political-economy literature blames inefficient policies on institutions or politicians' motives to supply bad policy, 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 these policies lower 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 negative direct effects, would help them to overcome social dilemmas and thereby increase welfare; conversely, subjects 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 affect other people's behavior, and that these mistaken beliefs exert a causal effect on the demand for bad policy.

Notes:

Print version record

December 2016.