Democracy, Populism, and (Un)bounded Rationality

In many instances, both voters and politicians are imperfectly informed about which policies are optimal. We analyze politicians’ policy choice in such situations. A distinctive element of our analysis is that we investigate how the strategic sophistication of voters’ beliefs about politicians’ behavior affects policy choice. This provides a novel approach in political economy that leads to a number of important insights. We show that these beliefs determine the strength of self-serving politicians’ incentives to engage in populism. Surprisingly, limited strategic sophistication of voters weakens politicians’ incentives to pander to public opinion. The reason is that politicians know that such voters expect them to choose a policy that is not perfectly pandering to public opinion. Furthermore, when comparing the welfare ranking of different constitutional regimes, we find that limited strategic sophistication of voters makes indirect democracy relatively more attractive compared to the case of full strategic rationality – and often more attractive than alternative constitutional regimes