Good Policy Choices Even When Voters Entertain Biased Beliefs: A Model with Endogenous Valence
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Abstract
In “The Myth of the Rational Voter” Brian Caplan shows that voters entertain systematically
biased beliefs on a number of essential issues of economic policy and concludes that this leads
democracies to choose bad policies. We introduce the psychological concept of mental models
to address voters’ naive reasoning about the economy and thereby explain the persistent
bias in beliefs. Next, we develop a game-theoretical model to show that this does not automatically
lead to bad policy choices. The model formalizes Caplan’s thought experiment No.
4 by introducing endogenous party valence to a model of probabilistic voting. In so doing, we
provide an investigation of when good policies are chosen in democracy. Based on our findings,
we discuss the impact of different political institutions on economic outcomes.
Keywords
VP-functions, valence, dynamic party competition, biased voting, Voting behaviour