Working Paper: CEPR ID: DP15213
Authors: Fausto Panunzi; Nicola Pavoni; Guido Tabellini
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: populism; prospect theory; behavioral political economics
JEL Codes: H00; D7; D9
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic shock (F69) | Economic disappointment (N12) |
| Economic disappointment (N12) | Risk loving behavior (D81) |
| Risk loving behavior (D81) | Support for populism (D72) |
| Economic shock (F69) | Support for populism (D72) |
| Economic shock (F69) | Higher tax preferences for safe candidates (H23) |
| Economic disappointment (N12) | Higher tax preferences for safe candidates (H23) |