Misspecified Politics and the Recurrence of Populism
-Micro Theory Seminar
PCPSE Room 100
*joint with Ronny Razin and Alwyn Young
Abstract: We consider populist policies as simple policies which do not take into account all variables generating economic outcomes. We develop a model of political competition between types, some populist and some who offer more complex policies. Periods in which the complex types govern increase the specification error of those who mistakenly believe in a simpler world view, leading them to underrate the effectiveness of complex policies and overestimate the positive impact of a few extreme policy actions. We show that in the unique Berk-Nash equilibrium political cycles must arise between the two types, with populist policies being extreme compared to those of the types with a complex world views, as well as collinear with these latter policies. We also establish convergence to this equilibrium.