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

This paper studies electoral competition over redistributive taxes between a safe incumbent and a risky opponent. As in prospect theory, economically disappointed voters become risk lovers, and hence are attracted by the more risky candidate. We show that, after a large adverse economic shock, the equilibrium can display policy divergence: the intrinsically 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 predictions on voters' behavior.

  • manuscript (612 Kb)
  • Last change 21/01/2021

    Optimal Delegation and Information Transmission under Limited Awareness

    We study the delegation problem between a principal and an agent, who not only has better information about the performance of the available actions but also has superior awareness of the set of actions that are actually feasible. The agent decides which of the available actions to reveal and which ones to hide. We provide conditions under which the agent finds it optimal to leave the principal unaware of relevant options. By doing so, the agent increases the principal’s cost of distorting the agent’s choices and thereby increases the principal’s willingness to grant him higher information rents. We also consider communication between the principal and the agent after the contract is signed and the agent receives information. We show that limited awareness of actions improves communication in such signalling games: the principal makes a coarser inference from the recommendations of the privately informed agent and accepts a larger number of his proposals.'

  • main manuscript (677 Kb)
  • online appendix (370 Kb)
  • Last change 21/01/2021

    Limited Awareness and Financial Intermediation

    We study the market interaction between financial intermediaries and retail investors, who not only face uncertainty about the performance of the different investments but also have limited awareness of the available investment opportunities. Intermediaries compete for investors via the menu of investment options they offer. We show that when competition is limited, intermediaries restrict their offers to extreme options, e.g. very risky and very safe products. We also consider investor heterogeneity and show that the presence of sophisticated, fully aware investors can impose a negative externality on investors with limited awareness. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model: the menus offered to less knowledgable investors contain few products, most of them are nevertheless perceived to be at the extremes.

  • manuscript (492 Kb)
  • Last change 18/01/2021

    The Dual Approach to Recursive Optimization: Theory and Examples
    PAVONI NICOLA (with C. Sleet and M. Messner)

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  • Last change 12/09/2016

    The Evolution of Awareness and Belief Ambiguity During the Process of High School Track Choice
    PAVONI NICOLA and Pamela Giustinelli

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  • Last change 15/11/2018

    Efficient Child Care Subsidies
    PAVONI NICOLA and Christine Ho

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  • Last change 10/03/2016

    Optimal Income Taxation with Asset Accumulation
    PAVONI NICOLA A. Abraham and S. Koehne

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  • Last change 10/12/2014

    Present-Biased Preferences and Optimal Taxation of Parental Transfers
    PAVONI NICOLA with H. Yazici

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  • Last change 23/10/2013

    Optimal Life-cycle Capital Taxation under Self-Control Problems
    PAVONI NICOLA with H. Yazici

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  • Last change 10/12/2014

    The Precautionary Saving Effect of Government Consumption
    PAVONI NICOLA with V. Ercolani

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  • Last change 24/07/2014

    Search and Work in Optimal Welfare Programs
    PAVONI NICOLA with O. Setty and G. Violante

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  • Last change 23/10/2013

    Last updated October 23, 2013