Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences

83 Pages Posted: 12 Sep 2020 Last revised: 9 Nov 2021

See all articles by Fausto Panunzi

Fausto Panunzi

Bocconi University - Department of Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Nicola Pavoni

Bocconi University - Department of Economics

Guido Tabellini

Bocconi University - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2020

Abstract

This paper studies electoral competition over redistributive taxes between a safe incumbent and a risky opponent. As in prospect theory, economically disappointed voters become risk lovers, and hence are intrinsically attracted by the more risky candidate. We show that, after a large adverse economic shock, the equilibrium can display policy divergence: the more risky candidate proposes lower taxes and is supported by a coalition of very rich and very disappointed voters, while the safe candidate proposes higher taxes. This can explain why new populist parties are often supported by economically dissatisfied voters and yet they run on economic policy platforms of low redistribution. We show that survey data on the German SOEP are consistent with our theoretical predictions on voters' behavior.

Keywords: Behavioral political economics, populism, prospect theory

JEL Classification: D7, D9, H00

Suggested Citation

Panunzi, Fausto and Pavoni, Nicola and Tabellini, Guido, Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences (August 2020). CEPR Discussion Paper No. DP15213, Available at SSRN: https://ssrn.com/abstract=3688166

Fausto Panunzi (Contact Author)

Bocconi University - Department of Economics ( email )

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20136 Milan
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European Corporate Governance Institute (ECGI)

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HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

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United Kingdom

Nicola Pavoni

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Guido Tabellini

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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