Misspecified Politics and the Recurrence of Populism

We develop a model of political competition between two groups that differ in
their subjective model of the data generating process for a common outcome. One group has a simpler model than the other group as they ignore some relevant policy variables. We show that perpetual changes of power are a natural feature of this dynamic learning environment and that simple world views -which can be interpreted as populist world views-imply extreme policy choices. Periods in which those with a more complex model govern increase the specification error of the simpler world view, leading the latter to underrate the effectiveness of complex policies and overestimate the positive impact of a few extreme policy actions. Periods in which the group with the simple world view implement their narrow policies result in subpar outcomes and a weakening of their omitted variable bias. Policy cycles arise, where each group’s tenure in power sows the seeds of its eventual electoral defeat.
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