ECONOMY

12 introduction: the reach of political economy
democracies differs greatly from this ideal. Voters appear to be notoriously uninformed
(and, indeed, have little incentive to become informed). Some voters base
theirchoiceofcandidatesolelyonpartylabel,whileothervotersrelyonbiased
sources of information, including information provided by pressure groups.
Does this apparent lack of information imply that democracy will fall far from
its ideal? Possibly not, if the lack of information is more apparent than real. In
the following pages, we show how voters can make logical inferences so that their
behavior is similar to perfectly informed voters.
We start with an easy example to illustrate how information revelation arises.
A number of articles study the endogenous timing of elections in parliamentary
systems. 10 Because it has access to information, the ruling party is able to forecast
future economic performance and other events that are likely to impact on voters’
welfare. This information is not likely to be available to the voters. The party in power
has an incentive to call an election when it is at the height of its popularity.
However, this decision-theoretic analysis does not consider the voter response to
an early election call. Voters can infer from an early election call that the ruling party
expects to do worse in the future. Voters can therefore infer that there is likely to be
badnewsinthefuture. 11 The ruling government realizes that voters will act this way.
As a result, governments are less likely to call early elections than they would otherwise
be, and when they do, voters will take this information into account and be less
positively inclined towards the government. Smith (2003, 2004) provides empirical
evidence in support of this argument. Polls taken after the announcement of an early
election show a decline from polls taken before the announcement. Incorporating the
voters’ response made obsolete much of the earlier research on endogenous timing of
elections that did not consider the possibility that voters could make inferences.
Let us now consider another area where earlier research assumed mechanical,
uninformed voters, but more recent research assumes uninformed but rational voters,
oftenwithstarklydiffering results. Starting with Ben Zion and Eytan (1974) and
continuing on into the recent past (see Baron 1994; Grossman and Helpman 1996),
an extensive literature has assumed that the more money a candidate spends on
advertising, the more votes the candidate receives from uninformed voters. Sources
of money tend to come from interests on the extremes of the political distribution. To
get contributions that pay for such advertising, candidates move their policies away
from the median voter toward a pressure group’s most preferred position.
Let us look at the Grossman and Helpman model in greater detail. 12 Grossman and
Helpman assume the following: voters, candidates, and pressure groups are arrayed
along a one-dimensional issue space. Each voter has a most preferred position with a
concave utility function over policy; this means that voters are risk averse. 13 There are
¹⁰ See for example, Cargill and Hutchison 1991 and the long list of citations found in Smith 2003,n.6.
¹¹ Here, we ignore other reasons for calling an early election, in particular the desire of the ruling
party in a coalition government to strengthen its hand.
¹² For heuristic purposes, we simplify their model.
¹³ Risk aversion means that voters prefer a sure thing over a lottery having the same expected value as
the sure thing.