Bnaya Dreyfuss (Alesina Seminar)

Speaker & Title

Bnaya Dreyfuss (Harvard), "Equilibrium Neglect and Political Feasibility"

Abstract

When voters underappreciate the equilibrium effects of policies, efficient reforms become politically infeasible. I develop a general framework of equilibrium neglect, and use this framework to construct a portable and generally applicable remedy. Using off-path contingent rebates, a social planner can generate a policy that (i) implements the social optimum, (ii) is budget balanced—on and off the equilibrium path—and (iii) is politically feasible even in the presence of equilibrium-neglecting voters. Analyzing existing data, I show that post-implementation surges in public support for congestion pricing are driven by frequent commuters who learn about its equilibrium benefits. In a novel survey experiment on congestion pricing with a large probability sample from six US metros, I show that respondents are overly pessimistic about traffic-reduction effects of congestion pricing, which correlates with strong opposition to the policy. Adding contingent compensation that pays if traffic remains high significantly increases public support, especially among potential compensation recipients. Turning to the supply side of policymaking, I survey civil servants and US state legislators. Both groups recognize my proposed remedy’s public appeal, and legislators’ own support for congestion pricing increases; civil servants, however, show a preference for more conventional tools.