People are not perfectly rational or self-interested. What does this mean for key issues in Public Choice?

May 7, 2017

During his keynote address at the EPCS Annual Meeting, Jean-Robert Tyran discussed selected laboratory experiments to demonstrate that social preferences and limited rationality are important to understanding voting behavior. He urged especially young scholars to explore the “exciting field” of behavioral economics.

The experiments Tyran chose focused on three topics: self-governance (are given policies more efficient when democratically chosen than when imposed?), information aggregation (do biases and rational ignorance undermine the “wisdom of the crowds” effect in direct democracy?), and taxation (how does misperception of tax burdens shape voting on taxes?). These experiments yielded some results which challenged the view of standard economics which is based on the assumptions that people are rational and self-interested.

Tyran and his colleagues found, for example, that a law making the contribution to a public good an obligation that is backed by only mild (i.e. non-deterrent) sanctions, has more legitimacy when people vote for it than when it is externally imposed. Because law that is perceived as legitimate is obeyed more often, voting induced an efficiency gain which Tyran labeled “a dividend of democracy.”

In an experiment to test the “wisdom of the crowds” effect, Tyran and collaborators found that although there was positive information aggregation when voters are competent (i. e. more likely to get it right than wrong), there is a “dark side of the vote” in that policies chosen in a majority vote are more likely to be wrong than those picked at random. Deliberation is a potential remedy, but the experimental results show that it improves efficiency only when voters are “competent.” Deliberation reduces efficiency when voters are biased.

In a third experiment, Tyran explored the idea that bounded rationality may not matter much for outcomes in competitive markets but it does for voting on taxing such markets. Tyran and his coauthor Rupert Sausgruber found that voters /consumers misperceive the consequences of taxation because they underestimate the extent of tax shifting. This induced them to favor taxing “sellers” over “buyers” even though the two ways of taxing a market are equivalent according to standard theory. Again, deliberation is a potential remedy for this bias but experiments show that free-form communication leads to group polarization – leading to more diverse opinions.

You can watch a recording of the April 21 keynote address that Jean-Robert Tyran made during the 2017 meeting of the European Public Choice Society at CEU in Budapest, Hungary below.