Democracy, Populism, and (Un)bounded Rationality

33 Pages Posted: 17 Nov 2008 Last revised: 25 Jul 2010

See all articles by Johannes Binswanger

Johannes Binswanger

University of St. Gallen

Jens Prufer

Tilburg University; Tilburg University - Department of Economics; Tilburg University - Law and Economics Center (TILEC)

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Date Written: July 21, 2010


In this paper we aim to understand how bounded rationality a ffects performance of democratic institutions. We consider policy choice in a representative democracy when voters do not fully anticipate a politician's strategic behavior to manipulate his reelection chances. We find that this limited strategic sophistication of voters aff ects policy choice in a fundamental way. Under perfect sophistication, a politician does not make any use of his private information but completely panders to voters' opinions. In contrast, under limited sophistication, a politician makes some use of private information and panders only partially. Limited sophistication crucially determines how welfare under representative democracy compares to welfare under alternative political institutions such as direct democracy or governance by independent agents. We find that, if voters' sophistication is limited, representative democracy is preferable to the other institutions, from a perspective "behind the veil of ignorance".

Keywords: Strategic sophistication, democracy, populism, level-k beliefs, ac- countability, experts.

JEL Classification: D72, D78, D83

Suggested Citation

Binswanger, Johannes and Prufer, Jens, Democracy, Populism, and (Un)bounded Rationality (July 21, 2010). TILEC Discussion Paper No. 2008-040, Available at SSRN: or

Johannes Binswanger (Contact Author)

University of St. Gallen ( email )

Dufourstrasse 50
St.Gallen, CH-9000

Jens Prufer

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE

Tilburg University - Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE

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