Working Paper: CEPR ID: DP6754
Authors: Roland Bnabou
Abstract: I develop a model of ideologies as collectively sustained (yet individually rational) distortions in beliefs concerning the proper scope of governments versus markets. In processing and interpreting signals of the efficacy of public and market provision of education, health insurance, pensions, etc., individuals optimally trade off the value of remaining hopeful about their future prospects (or their children's) versus the costs of misinformed decisions. Because these future outcomes also depend on whether other citizens respond to unpleasant facts with realism or denial, endogenous social cognitions emerge. Thus, an equilibrium in which people acknowledge the limitations of interventionism coexists with one in which they remain obstinately blind to them, embracing a statist ideology and voting for an excessively large government. Conversely, an equilibrium associated with appropriate public responses to market failures coexists with one dominated by a laissez-faire ideology and blind faith in the invisible hand. With public-sector capital, this interplay of beliefs and institutions leads to history-dependent dynamics. The model also explains why societies find it desirable to set up constitutional protections for dissenting views, even when ex-post everyone would prefer to ignore unwelcome news.
Keywords: Cognitive Dissonance; Ideology; Institutions; Laissez-Faire; Political Economy; Psychology; Statism; Wishful Thinking
JEL Codes: D72; D83; H11; P16; Z1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual beliefs (D01) | social institutions (D02) |
| social institutions (D02) | individual beliefs (D01) |
| hopeful beliefs about future prospects (E66) | misinformed decisions (D80) |
| citizens collectively deny unpleasant facts (D70) | vote for larger government (D72) |
| vote for larger government (D72) | suboptimal policy choices (D78) |
| historical context and public capital (H54) | prevailing ideology (P16) |
| market failures (D52) | belief in laissez-faire ideologies (P16) |