The Demand for Bad Policy When Voters Underappreciate Equilibrium Effects

55 Pages Posted: 12 Dec 2016 Last revised: 14 Aug 2021

See all articles by Ernesto Dal Bo

Ernesto Dal Bo

University of California, Berkeley - Haas School of Business - Business and Public Policy

Pedro Dal Bo

Brown University - Department of Economics

Erik Eyster

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: December 2016

Abstract

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.

Suggested Citation

Dal Bo, Ernesto and Dal Bo, Pedro and Eyster, Erik, The Demand for Bad Policy When Voters Underappreciate Equilibrium Effects (December 2016). NBER Working Paper No. w22916, Available at SSRN: https://ssrn.com/abstract=2883952

Ernesto Dal Bo (Contact Author)

University of California, Berkeley - Haas School of Business - Business and Public Policy ( email )

Berkeley, CA 94720
United States

Pedro Dal Bo

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-2953 (Phone)
401-863-1970 (Fax)

HOME PAGE: http://www.econ.brown.edu/fac/Pedro_Dal_Bo/

Erik Eyster

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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