Abstract
Our knowledge about how the economy works is far froth perfect. Hence aggressive policies without solid economics foundations may suffer from large uncertainty in their outcomes. However, it has been often observed that such blind policy-making, sometimes called as“Voodoo Economics”, attracts strong political support in real politics. On the one hand, why do politicians adopt such risky policies? On the other hand, why do voters prefer such risky politicians? While it is usually argued that the popularity of“Voodoo Economics”stems from voters' irrationality or their lack of economics knowledge, this paper offers an alternative rational explanation. Specifically, it is shown that, in the presence of electoral competition, the adoption of risky policies can be a signal of politicians' confidence in their high ability and, if the benefits of ability outweigh the costs of uncertainty, voters actually prefer risky politicians. Meanwhile, given this preference of voters, politicians willingly adopt risky policies in order to win office. It is also shown that, under this signaling mechanism, an increase in the number of politicians participating in electoral competition may harm voters since it strengthens politicians' incentives for taking risk, i.e., stiffer electoral competition can exacerbate rather than alleviate the problem.
