5 December 2014
San Francesco - Via della Quarquonia 1 (Classroom 1 )
We study how loss aversion affects the political equilibrium in a simple majority voting model. First, we show a status quo bias, which leads to path dependence. Second, loss aversion implies a moderating effect on the most extreme voters. Third, in a dynamic setting, the effect of loss aversion diminishes with the length of the planning horizon of voters; however, in the presence of a projection bias, majorities are partially unable to understand how fast they will adapt to a new policy. This makes changes less likely and induces time inconsistency: policy changes are timid at the beginning, while in later periods they are made progressively more radical. Fourth, in a stochastic environment, loss aversion yields a significant distaste for risk, but also a smaller attachment to the status quo. The application of these results to a model of redistribution leads to empirically plausible implications.