Working Paper: NBER ID: w13907
Authors: Roland Bénabou
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: Ideology; Collective beliefs; Government intervention; Market efficacy; Public policy
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 |
|---|---|
| collective denial of unpleasant realities (D70) | support for large government (H10) |
| acknowledgment of limitations of welfare state (I38) | statist ideology (P16) |
| market failures (D52) | underinvestment in public goods (H40) |
| underinvestment in public goods (H40) | laissez-faire ideology (P16) |
| laissez-faire ideology (P16) | blind faith in market solutions (P10) |