Economic Shocks and Populism: The Political Implications of Reference-Dependent Preferences

Arbeitspapier

This paper studies electoral competition over redistributive taxes between a safe incumbent and a risky opponent. As in prospect theory, economically disappointed voters bcome 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 predicions on voters' behavior.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8539

Classification and Topics

• Classification: Wirtschaft ; Public Economics: General ; Analysis of Collective Decision-Making: General ; Micro-Based Behavioral Economics: General‡
• Subject: populism ; prospect theory ; behavioral political economics

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Panunzi, Fausto ; Pavoni, Nicola ; Tabellini, Guido
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/226241
• Last update: 10.03.2025, 11:42 AM CET