Friday, April 8, 2011

Why American politicians lie

Many advertisements are misleading, with the intend of making people buy goods they would not buy had they known the truth. This overconsumption leads to welfare losses, which is why you would want to regulate truth in advertising. But, in a market that is not competitive, households tend to consume less than optimal. Does this mean we should then avoid regulating ads, or regulate them less, in order to get to the optimal quantity of consumption?

This is the question Keisuke Hattori and Keisaku Higashida ask with a model of false advertising in a duopoly. They suppose that consumers are easily fooled and ads of one firm also increase demand for the other firm's good. They show that prohibiting truth in advertising (or educating consumers) may have negative welfare consequences if the goods are close to homogeneous because of the resulting under-provision of goods. But taxing misleading or joint advertising is welfare improving. In an interesting extension where there are smart and naive consumers, smart consumers suffer because the naive ones induce more misleading ads and higher prices.

Now think about politicians. There are only two parties who offer goods that are after all little different from each other. Voters are easily fooled. The model above implies that politicians will lie extensively and deliver very few goods. Draw your conclusions.


Anonymous said...

Would a third party solve the problem? I guess not, because they still have strategic power, even if less of it.

Kansan said...

With a third party, the difference is that the parties would not be similar (remember Hotelling's beach?) and thus the good would not be homogeneous.

Unknown said...

I think you may find disagreement with the assertion that politicians "offer goods that are after all little different from each other." I can quite easily see very very large differences between the Republican product and the Democratic one.

Economic Logician said...

Democrats and Republicans are remarkably similar, especially once in power. That is in particular true once you compare them to other parties in Europe, Canada or elsewhere.