Rational ignorance, populism, and reform

This paper studies how voters' demand for economic reforms affects the probability that successful or populist reforms are adopted. We study a model of electoral competition with rationally ignorant voters in which the success of a reform is tied to a politician's unobservable competence. We show that when voters' demand for reform is high, candidates engage in a form of populism and propose reformist agendas regardless of their ability to successfully carry them out. As voters are then faced with either risky reformers or policy inaction, the relationship between demand for reform and the probability that any (i.e., genuine or populist) policy change is implemented depends on how harmful botched reforms are. Our results help organize the mixed empirical evidence regarding the impact of crises on the likelihood of reform. They also suggest that the rise of populism may cause political disenchantment rather than the other way round.