Contagion of Populist Extremism

Abstract

To explore the propagation of populist extremism across countries, we construct a multi-country model wherein each country's politician sequentially implements a policy. Voters learn the incumbent politician's type and the desirable policy by observing foreign policies on top of the domestic policy. We first establish a preliminary result--- that populist extremism, wherein undesirably extreme policies are supported by voters, arises when the public opinion is sufficiently radical. We then show that populist extremism is contagious across countries through a novel mechanism: the dynamic interaction between the public opinion and implemented policies. Whether the contagion stops in the long run depends on the correlation of the desirable policy across countries. Extremism eventually disappears under the perfect correlation, while either the convergence toward extremism hold or the cycles of extremism hold when the state of the world follows a Markov process without absorbing states. Our model is also applicable to various agency problems with observational learning.

Keywords: Populism, Agency problems, Observational learning, Yardstick competition, Signaling

JEL Classification: D72, D83, H73