Misspecified Politics and the Recurrence of Populism (Seminar-At-A-Distance)

Abstract:

We develop a model of political competition between types that differ in their specification of the data-generating process for a common outcome. We show that misspecified beliefs converge on a simpler view of the world which suffers from omitted variable bias. Periods in which those with a correctly specified and endogenously more complex model govern increase the specification error of the simpler world view, leading the latter to underrate the effectiveness of complex policies and overestimate the positive impact of a few extreme policy actions. Periods in which endogenously simple types implement their narrow world view result in subpar outcomes and a weakening of their omitted variable bias. Policy cycles arise, where each type's tenure in power sows the seeds of its eventual electoral defeat. 

(Joint with Gilat Levy, Alwyn Young)