Wednesday, 13 July 2011

The Dracula Effect

Why do we vote for politicians who propose protectionist trade policies when it is not in our interest to do so? In a seminar held by Giacomo Ponzetto at the Universitat Pompeu Fabra this summer a simple answer was proposed to me: we don’t know we’re doing it.

The argument goes like this:
An individual consumer (like you or I) has no incentive to inform themselves of a candidate’s trade policy since their chance of affecting the electoral outcome is effectively zero. Producers on the other hand, regardless of their ability to influence the election result, value information on trade policies because it allows them to forecast prices and make appropriate investments. Producers are in the know and consumers are oblivious.

Politicians will therefore propose protectionist policies since this will boost their popularity amongst producers whilst the uninformed consumer is none the wiser. This is a very interesting theory because it says that producers will be offered protection even without forming a lobby - the mere existence of information in their minds is enough to secure a political favour!

This set up is good for everyone. Except consumers. And unfortunately, consumers make up the majority of ‘everyone’. Producers get a nice little pay-off, politicians get extra votes without sacrificing uninformed consumer support and the consumer unwittingly picks up the bill through higher prices.

So what on earth does this have to do with Dracula?

Exposing a vampire to the harsh light of day is sufficient to reduce him/her to dust. The Dracula Effect says the same will occur to consumer-hostile policies when they are exposed to the harsh light of public attention. If consumers are just as informed as producers, the politician can no longer get away with his furtive bribe and those terrible tariffs turn to dust.

If you’re interested, see Ponzetto’s paper here for empirical evidence on the Dracula Effect

Post written by Stephen Devlin - 3rd year MA (Hons) Economics

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