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Behavioral Economics and Political Economy
Abstract
The past and future impact of behavioral economics in the field of political economy is assessed. It is argued that politician leaders operate in an intensely competition environment where the framework of rational choice is compelling. In contrast, rational choice is less compelling when studying the behavior of voters in mass elections where the consequences of each individual’s choices are negligible. A discussion of the literature on why voters bother to vote and on the choices voters make when casting their ballots illustrates the limits of explanations based on rational decision-makers and the potential contribution of behavioral research to the study of political economy.
Why is an understanding of political competition essential for the study of public economics and public policy generally? How can political competition be described and understood, and how does it differ from its strictly economic counterpart? What are the implications of the fact that policy proposals in a democracy must always pass a political test? What are the strengths and weaknesses of electoral competition as a mechanism for the allocation of economic resources? Why are tax structures in democratic polities so complicated, and what implications follow from this for normative views about good policy choice? How can we measure the intensity of political competition, why and how does it vary in mature democracies, and what are the consequences? This Element considers the approach to answer these questions, while also illustrating some of the interesting theoretical and empirical work that has been done on them.
We propose that policy-making in the realm of innovation policy can be fruitfully analyzed from the perspective of Behavioral Political Economy. Citizens, policy-makers and also bureaucrats are prone to biases that have been empirically identified in behavioral economic and psychological research. When applied to innovation policy, it can be shown that under certain conditions, policy-makers are willing to support riskier innovative projects and that this tendency is amplified by public sector incentives, such as soft budget constraints. The same holds for a tendency to support ongoing innovative projects even if their profitability becomes increasingly doubtful. Finally, we also highlight how special-interest policies aimed at distorting risk perceptions can slow down the innovation process.
Few people have bothered to defend the majoritarian, winner take all character of the Canadian electoral system, in which the party that wins the most seats in plurality-rule constituency elections is granted a franchise to govern by itself for a maximum term. This electoral system has been in existence in the same form since the founding of the modern state in 1867. In this paper, I offer a vigorous defense of our Majoritarian arrangements when the alternative is some form of Proportional Representation. While the individual arguments I employ are well known, the train of reasoning here is, to my knowledge, unusual in the current Canadian context.
Forthcoming in: Across Boundaries: Essays in Honour of Robert A. Young. André Blais, Cris de Clercy, Anna Esselment and Ronald Wintrobe (editors), Chapter 12. McGill-Queen's University Press 2021
Studies of the electoral consequences of changing economic conditions have not been able to distinguish the effects of macroeconomic conditions on the vote from those of personal financial circumstances. That is because research to date has relied either on exclusively aggregate-level information analyzed longitudinally or exclusively individual-level survey data analyzed cross-sectionally. This study employs a pooling of National Election Studies survey data, 1956-84, augmented by a time series of national economic statistics to evaluate "sociotropic" and "pocketbook" conceptions of voting and to assess the advantage of incumbency in presidential elections. Personal financial predicaments are found to carry weight in individuals' voting decisions, but changing macroeconomic conditions are more important as determinants of election outcomes. Also, the degree to which incumbency is an electoral asset depends upon election-year economic circumstances. Although it was not designed for such purposes, the model presented here generally forecast presidential election outcomes well, even though it ignored the personalities and issues of the campaigns. That result provokes some thoughts about the impact of campaign events and strategies on presidential contests.
The formal model of political competition almost ubiquitously employed by students of political economy is one in which political parties play no role. That model, introduced by Anthony Downs (1957) over forty years ago, portrays a competition between candidates, whose sole motivation for engaging in politics is to enjoy the power and perquisites of office holding. Although voters care about policies, the candidates do not; for them, a policy is simply an instrument to be used, opportunistically, as an entry ticket to a prosperous career. Political parties, however, have, throughout the history of democracy, cared about policies, perhaps because they are formed by interest groups of citizens. Therefore the Downsian model cannot be viewed as an historically accurate model of party competition.
This landmark theoretical book is about the mechanisms by which special interest groups affect policy in modern democracies. Defining a special interest group as any organization that takes action on behalf of an identifiable group of voters, Gene Grossman and Elhanan Helpman ask: How do special interest groups derive their power and influence? What determines the extent to which they are able to affect policy outcomes? What happens when groups with differing objectives compete for influence? The authors develop important theoretical tools for studying the interactions among voters, interest groups, and politicians. They assume that individuals, groups, and parties act in their own self-interest and that political outcomes can be identified with the game-theoretic concept of an equilibrium. Throughout, they progress from the simple to the more complex. When analyzing campaign giving, for example, they begin with a model of a single interest group and a single, incumbent policy maker. They proceed to add additional interest groups, a legislature with several independent politicians, and electoral competition between rival political parties. The book is organized in three parts. Part I focuses on voting and elections. Part II examines the use of information as a tool for political influence. Part III deals with campaign contributions, which interest groups may use either to influence policy makers' positions and actions or to help preferred candidates to win election.
We analyze a model of a two-candidate election with costless voting in which voters have asymmetric information and diverse preferences. We demonstrate that a strictly positive fraction of the electorate will abstain and that, nevertheless, elections effectively aggregate voters' private infomation. Using examples, Mle show that more informed voters are more likely to vote than their less informed counterparts. Increasing the fraction of the electorate that is informed, however; may lead to higher levels of abstention. We conclude by showing that a biased distribution of information can lend to a biased voting population but does not lean to biased outcomes.
A simple ``Bread and Peace'' model shows that aggregate votes forPresident in postwar elections were determined entirely byweighted-average growth of real disposable personal income percapita during the incumbent party's term and the cumulativenumbers of American military personnel killed in action as aresult of U.S. intervention in the Korean and Vietnamese civilwars. The model is subjected to robustness tests against twenty-two variations in functional form inspired by the extensiveliterature on presidential voting. Not one of these variationsadds value to the Bread and Peace model or significantly perturbsits coefficients. Copyright Kluwer Academic Publishers 2000
The authors analyze two-candidate elections in which some voters are uncertain about the realization of a state variable that affects the utility of all voters. They demonstrate the existence of a swing voter's curse: less informed indifferent voters strictly prefer to abstain rather than vote for either candidate even when voting is costless. The swing voter's curse leads to the equilibrium result that a substantial fraction of the electorate will abstain even though all abstainers strictly prefer voting for one candidate over voting for another. Copyright 1996 by American Economic Association.
A simple "Bread and Peace" model shows that aggregate votes for President in postwar elections were determined entirely by weighted-average growth of real disposable personal income per capita during the incumbent party's term and the cumulative numbers of American military personnel killed in action as a result of U.S. intervention in the Korean and Vietnamese civil wars. The model is subjected to robustness tests against twenty-two variations in functional form inspired by the extensive literature on presidential voting. Not one of these variations adds value to the Bread and Peace model or significantly perturbs its coefficients.
It is widely assumed that political action is motivated most powerfully by issues that impinge immediately and tangibly upon private life. For example, this assumption pervades the aggregate research that has reported consistent relationships between general economic conditions and congressional election outcomes (e.g., Kramer, 1971). Our analysis of individual-level data, however, indicates that voting in congressional elections from 1956 to 1976 was influenced hardly at all by personal economic grievances. Those voters unhappy with changes in their financial circumstances, or those who had recently been personally affected by unemployment, showed little inclination to punish candidates of the incumbent party for their personal misfortunes. The connection between economic conditions and politics was provided, instead, by judgments of a more general, collective kind--e.g., by judgments regarding recent trends in general business conditions, and, more powerfully, by judgments about the relative competence of the two major parties to manage national economic problems. These collective economic judgments had little to do with privately experienced economic discontents. Rather they stemmed from voters' partisan predispositions and from their appraisal of changes in national economic conditions.
The paradox of not voting is examined in a model where voters have uncertainty about the preferences and costs of other voters. In game-theoretic models of voter participation under complete information, equilibrium outcomes can have substantial turnout even when voting costs are relatively high. In contrast, when uncertainty about preferences and costs is present, only voters with negligible or negative net voting costs participate when the electorate is large.
A continuum of voters, indexed by income, have preferences over economic outcomes. Two political parties each represent the interests of given constituencies of voters: the rich and the poor. Parties/candidates put forth policies—for instance, tax policy, where taxes finance a public good. Voters are uncertain about the theory of the economy, the function that maps policies into economic outcomes. Parties argue, as well, for theories of the economy. Each voter has a prior probability distribution over possible theories of the economy; after parties announce their theories of the economy, each voter constructs an a posteriori distribution over such theories. Suppose that voters are unsure how efficiently the government converts tax revenues into the public good. Under reasonable assumptions the party representing the rich argues that the government is very inefficient and the party representing the poor argues the opposite. What appear as liberal and conservative ideological views emerge as simply good strategies in the electoral game.
The Condorcet July Theorem states that majorities are more likely than any single individual to select the ''better'' of two alternatives when there exists uncertainty about which of the two alternatives is in fact I preferred Most extant proofs of this theorem implicitly make the behavioral assumption that individuals vote ''sincerely'' in the collective decision making, a seemingly innocuous assumption, given that individuals are taken to possess a common preference for selecting the better alternative. However, in the model analyzed here we find that sincere behavior by all individuals is not rational even when individuals have such a common preference. In particular, sincere voting does not constitute a Nash equilibrium. A satisfactory rational choice foundation for the claim that majorities invariably ''do better'' than individuals, therefore, has yet to be derived.
It is often suggested that requiring juries to reach a unanimous verdict reduces the probability of convicting an innocent defendant while increasing the probability of acquitting a guilty defendant. We construct a model that demonstrates how strategic voting by jurors undermines this basic intuition. We show that the unanimity rule may lead to a high probability of both kinds of error and that the probability of convicting an innocent defendant may actually increase with the size of the jury. Finally, we demonstrate that a wide variety of voting rules, including simple majority rule, lead to much lower probabilities of both kinds of error.
We contrast the rational theory of choice in the form of expected utility theory with descriptive psychological analysis in the form of prospect theory, using problems involving the choice between political candidates and public referendum issues. The results showed that the assumptions underlying the classical theory of risky choice are systematically violated in the manner predicted by prospect theory. In particular, our respondents exhibited risk aversion in the domain of gains, risk seeking in the domain of losses, and a greater sensitivity to losses than to gains. This is consistent with the advantage of the incumbent under normal conditions and the potential advantage of the challenger in bad times. The results further show how a shift in the reference point could lead to reversals of preferences in the evaluation of political and economic options, contrary to the assumption of invariance. Finally, we contrast the normative and descriptive analyses of uncertainty in choice and address the rationality of voting.
Many advocates of democracy believe that it is the most responsive form of government, but acknowledge that citizens are remarkably ignorant and frequently unable to connect their preferences to their political choices. Squaring these two judgments has proven very difficult. To begin doing so, we examine a stylized world in which two parties compete for votes from citizens with political interests represented by single-peaked utility functions over a unidimensional ideological space. The voters do not know what policy was implemented by the incumbent party, what policy would be implemented by the opposition party, what policies would serve their interests, nor even that an ideological dimension exists. They know only whether their past experiences in the public sphere have been pleasurable or painful, and they vote accordingly. Thus they are retrospective voters who are ignorant but not stupid. We show, under symmetry conditions on the distribution of voters' "ideal points," that reelection-seeking incumbents in this stylized world will attempt to implement the ideal policy of the median voter. Democratic competition may thus produce policy that is responsive to the political interests of citizens even when voters cannot observe the parties' policy choices and cannot formulate any explicit policy preferences of their own.
There are several major insights which this game theoretic analysis has produced. First, we have shown that equilibria exist with substantial turnout even when both the majority is much larger than the minority and the costs of voting are exceptionally high. For example, in large electorates using the status quo rule, we show mixed-pure equilibria with turnout roughly equal to twice the size of the minority when the cost is nearly equal to 37% (e
–1 100) of the reward (B). Second, with large electorates the many equilibria appear to reduce to just two types, the type just mentioned and a type with almost no turnout. Third, we have shown that turnout may rise as the costs of voting rise. This results when all members of a team adjust their turnout probabilities so that the probability of being pivotal increases to match the increased cost of voting. We have also shown that turnout is nearly invariant with costs in large electorates where turnout probabilities approach one or zero. Fourth, the actual split of the vote is likely to be a biased measure of the actual distribution of preferences in the electorate. Because majorities have greater incentives to free-ride, they will turn out less heavily than minorities. Elections can be relatively close, even when one alternative is supported by a substantial majority of the electorate. The probability that the majority will win does not seem to be closely related to the size of the electorate or its size relative to the minority. However, turnout is quite strongly correlated with the relative sizes of the minority and the majority.
The simple pressure group model of political redistribution can predict more with less restrictive assumptions. Instead of ready-made pressure groups composed of individuals who vote their pocketbooks, we posit heterogeneous agents each of whom decides which group to join and how much effort to expend on political activity. Our model then examines ‘social affinity’ conditions that foster pressure group formation. Political sympathies based on social affinity imply testable effects of growth rate and income distribution on progressive transfers, effects that prove substantial in pooled time-series cross-section regressions for 13 OECD countries, 1960–1981.
The two main political parties in the United States in the period 1976–1992 put forth policies on redistribution and on issues pertaining directly to race. We argue that redistributive politics in the US can be fully understood only by taking account of the interconnection between these issues in political competition. We identify two mechanisms through which racism among American voters decreases the degree of redistribution that would otherwise obtain. In common with others, we suggest that voter racism decreases the degree of redistribution due to an anti-solidarity effect: that (some) voters oppose government transfer payments to minorities whom they view as undeserving. We suggest a second effect as well: that some voters who desire redistribution nevertheless vote for the anti-redistributive (Republican) party because its position on the race issue is more consonant with their own, and this, too, decreases the degree of redistribution in political equilibrium. This we name the policy bundle effect. We propose a formal model of multi-dimensional political competition that enables us to estimate the magnitude of these two effects, and estimate the model for the period in question. We compute that voter racism reduced the income tax rate by 11–18% points; the total effect decomposes about equally into the two sub-effects. We also find that the Democratic vote share is 5–38% points lower than it would have been, absent racism. The magnitude of this effect would seem to explain the difference between the sizes of the public sector in the US and northern European countries.
I study the effect of voters with a group-based social conscience. Voters care more about the well-being of those belonging to their own group than the rest of the population. Within a model of political tax determination, both fractionalization and group antagonism reduce the support for redistribution. Whereas within group inequality increases support for redistribution, inequality between groups has the opposite effect. These results hold even if a poor group forms a majority. Using a panel constructed from US micro data, I find support for the hypothesis that within race inequality increases redistribution while between race inequality decreases redistribution.
Capitalism, Socialism and Democracy remains one of the greatest works of social theory written in the twentieth Century. Schumpeter's contention that the seeds of capitalism's decline were internal, and his equal and opposite hostility to centralist socialism have perplexed, engaged and infuriated readers since the book's first publication in 1943. By refusing to become an advocate for either position, Schumpeter was able both to make his own great and original contribution and to clear the way for a more balanced consideration of the most important social movements of his and our time.
The electronic version of this book has been prepared by scanning TIFF 600 dpi bitonal images of the pages of the text. Original source: To vote or not to vote? : the merits and limits of rational choice theory / André Blais.; Blais, André, 1947-.; viii, 200 p. ; 24 cm.; Pittsburgh, Pa. :; This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 2 of the TEI in Libraries Guidelines. Digital page images are linked to the text file.
For a long while, economists, like specialists in other fields, often took it for granted that groups of individuals with common interests tended to act to further those common interests, much as individuals might be expected to further their own interests. If a group of rational and self-interested individuals realized that they would gain from political action of a particular kind, they could be expected to engage in such action; if a group of workers would gain from collective bargaining, they could be expected to organize a trade union; if a group of firms in an industry would profit by colluding to achieve a monopoly price, they would tend to do so; if the middle class or any other class in a country had the power to dominate, that class would strive to control the government and run the country in its own interest. The idea that there was some tendency for groups to act in their common interests was often merely taken for granted, but in some cases it played a central conceptual role, as in some early American theories of labour unions, in the ‘group theory’ of the ‘pluralists’ in political science, in J.K. Galbraith’s concept of ‘countervailing power’, and in the Marxian theory of class conflict.
When news of the O. J. Simpson verdict swept across the United States, a nation stood divided as blacks and whites reacted differently to the decision. Seldom has the racial division that permeates our society come so clearly and prominently into view. Divided by Color supplies the reasons for this division, asserting that racial resentment continues to exist. Despite a parade of recent books optimistically touting the demise of racial hostility in the United States, the authors marshal a wealth of the most current and comprehensive evidence available to prove their case. Kinder and Sanders reveal that racial resentment remains the most powerful determinant of white opinion on such racially charged issues as welfare, affirmative action, school desegregation, and the plight of the inner city. But more than a comprehensive description of American views on race, Divided by Color seeks to explain just why black and white Americans believe what they do. Kinder and Sanders analyze the critical factors that shape people's opinion on race-related issues, uncovering the relative importance of self-interest, group identity, ideological principles, as well as racial animosity. Finally, the authors explore how the racial divide has insinuated itself into the presidential election process and examine the role of political elites in framing racial issues for ordinary citizens. The most accurate and thorough analysis of American attitudes toward race and racial policies undertaken in decades, Divided by Color is destined to become a landmark work on race in America.
Just like economists, voters have conflicting views about redistributive taxation because they estimate its incentive costs differently. We model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs. In the long run 'left-wing dynasties' believing less in individual effort and voting for more redistribution coexist with 'right-wing dynasties.' This allows us to explain why individual mobility experience and not only current income matters for political attitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
At least since Downs’s (1957) seminal work An Economic Theory of Democracy, rational choice theorists have appreciated the “paradox of not voting.” In a large election, the probability that an individual vote might change the election outcome is vanishingly small. If each person only votes for the purpose of influencing the election outcome, then even a small cost to vote—like a minor schedule conflict or mildly bad weather—should dissuade anyone from voting. Yet it seems that many people will put up with long lines, daunting registration requirements and even the threat of physical violence or arrest in order to vote. Given the central place of voting within political economy, the lack of an adequate rational choice model of large elections with costly voting presents an obvious problem. For the most part, theorists have bypassed the turnout problem either by eliminating voters as strategic actors or by assuming that the decision to vote is independent of other strategic choices. The problem with the first approach is that the empirical literature on voting behavior provides considerable evidence of apparently strategic behavior. In primary elections, there is evidence that voters condition their vote choice on the viability of candidates (Abramson, Aldrich, Paolino and Rohde, 1992). In a seminal and comprehensive study, Cox (1997) shows that voting patterns and election outcomes are broadly consistent with patterns of behavior predicted by strategic voting models. For example, under plurality rule (in which the candidate with the most votes wins the election),
Standard agency theory suggests that rational voters will vote to re-elect politicians who deliver favorable outcomes. A second implication is that rational voters will not support a politician because of good outcomes unrelated to the politician’s actions. Specifically, rational voters should try to filter signal from noise, both in order to avoid electing incompetent, but lucky politicians, and to maximize the link between their votes and optimal incentives. This paper provides insight into the information processing capacities of voters, by measuring the extent to which they irrationally reward state governors for economic fluctuations that are plausibly unrelated to gubernatorial actions. Simple tests of relative performance evaluation reveal that voters evaluate their state’s economic performance relative to the national economy. However, these tests only provide evidence of rule-of-thumb performance filtering. More sophisticated tests reveal that voters in oil-producing states tend to re-elect incumbent governors during oil price rises, and vote them out of office when the oil price drops. Similarly, voters in pro-cyclical states are consistently fooled into re-electing incumbents during national booms, only to dump them during national recessions. Consistent with an emerging behavioral literature, this suggests that voters make systematic attribution errors and are best characterized as quasi-rational.
Conventional analysis of the decision of expected utility maximizing agents to vote has concluded that it is irrational to vote unless voters have a distorted view of their individual impact or place a direct value on the act of voting. On the other hand, mathematical analyses of the electoral process (see, e.g., Davis, Hinich, Ordeshook (1970)), have usually assumed that all voters vote. Each theory is incorrect in the sense that in actual elections turnout is neither zero nor 100%. In this paper we will argue that previous analyses of expected utility maximizing voters s topped too soon because of the partial equilibrium approach and that if each voter considers the simultaneous reactions of all voters in a "rational" manner, then depending on the location of the candidates' platforms, turnout will usually be positive but less than 100%. In particular we will derive a (probabilistic) vote supply function, given a distribution of voters and the choice of platforms of candidates, which has the property that, even with costs of voting, unless the candidates have identical platforms, the expected turnout is positive. The model and these results are presented in sections 1a and 1b.
Blind Introspection: Electoral Responses to Drought, Flu and Shark Attacks Paper prepared for presentation at the Annual Meeting of the American Political Science Association Social Choice and Individual Values
- George E Johnson
Blind Introspection: Electoral Responses to Drought, Flu and Shark Attacks. Paper prepared for presentation at the Annual Meeting of the American Political Science Association, Boston. Arrow, Kenneth J. 1951. Social Choice and Individual Values. New Haven: Yale University Press. Ashenfelter, Orley and George E. Johnson. 1969
Bargaining Theory, Trade Unions and Industrial Strike Activity Information Aggregation, Rationality and the Condorcet Jury Theorem
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Bargaining Theory, Trade Unions and Industrial Strike Activity. American Economic Review, 59(1): 35-49. Austen-Smith, David and Jeffrey S. Banks. 1996. Information Aggregation, Rationality and the Condorcet Jury Theorem. American Political Science Review, 90(1):34-45
Who Votes? New Haven
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