Psychology and economic behavior: theory tests and applications

The goal of this project was to study the role of human psychology, and in particular of selective attention and memory in shaping belief formation and choice, with particular reference to the political domain. The project has successfully explored new research avenues and had produced research papers that are already receiving significant attention, have been presented at major international conferences, and are already published or are about the be published in leading international outlets.

• The paper “Identity, Beliefs and Political Conflict”, joint with Guido Tabellini, has been accepted for publication in the Quarterly Journal of Economics, a leading economic journal. In this paper, we seek to explain the rise of populist parties and the changing locus of political conflict away from standard redistributive conflict, which is puzzling in light of growing income inequality. To do so, we present a theory founded on the social psychology of identity. The theory builds on two ideas. First, when policy conflict renders a certain social divide—economic or cultural—salient, a voter identifies with her economic or cultural group. Second, the voter slants her beliefs toward the stereotype of the group she identifies with. The theory yields three empirically testable implications. First, voters’ beliefs are polarized along the distinctive features of salient groups. Second, if the salience of cultural policies increases, cultural conflict rises, redistributive conflict falls, and polarization becomes more correlated across issues. Third, economic shocks hurting conservative voters may trigger a switch to cultural identity, causing these voters to demand less redistribution. To assess these predictions, we analyze U.S. survey evidence from the ANES dataset. We find that, consistent with the theory, growing importance of cultural policy issues such as civil rights or race is associated with increased voter disagreement on these domains and reduced disagreement on redistribution, with a reduction in redistributive conflict among opposite economic classes, and with a reduction in identification of voters with economic classes themselves. The project has used the resources of the grant to hire collaborators, in particular Daniele D’Arienzo, engaging in the analysis of the ANES data, in helping with the analysis of the theoretical model, and with proofreading.

• A second paper written under the project is (provisionally) entitled “Identity and Political Supply”. It is also joint with Guido Tabellini. This paper has been already presented at the Econometric Society Congress in Arica, China, and Australia. It will be published in Econometrica, another leading economic journal. This paper starts from the approach to identity, stereotypes and political demand developed in “Identity, Beliefs, and Political Conflict”, and develops the analysis along three lines. First, we conduct a large representative in Prolific to measure the identity of US voters and the association between such identity and policy preferences and factual beliefs. The survey shows that most US voters nowadays identify with cultural groups such as their religion or race, rather than with their economic class, and that cultural identity is associated with more conservative policy preferences in both social and economic domains. We also shows that these same voters have more conservative beliefs on factual issues both in social and economic domains, confirming the important of stereotyped worldviews that may lead to systematically inaccurate beliefs about the world. After motivating the role of identity for voters’ political demands, we develop a model in which strategic politicians compete to attract identified voters. We find that a switch of voters’ identify from economic to cultural groups causes increased policy divergence and hence conflict between left and right wing politicians, which is mostly concentrated in cultural issues, and also increases political propaganda aimed at fueling outgroup stereotypes. This causes a realignment of conservative and poorer voters from the left to the right, consistent with existing evidence. We also show that, in this context, exposure to international trade can cause a shift to cultural identity, reconfiguring political conflict along cultural lines and reducing conflict over redistribution. Using survey data and data on political speeches by US congressmen, we show that greater trade exposure (measured using the methods developed by Autor et al) indeed exerts these effects. This paper has used the resources of the grant to conduct online interviews, to hire collaborators, in particular Frieder Neunhoeffer, performing data analysis, model analysis and proofreading.
   
• A third project, with Guido Tabellini and Freddie Schwerter, is (provisionally) entitled “Salient Cleavages and Changing Political Identities”. In this paper, we conduct a priming experiment in which we exogenously render a specific political identity salient (i.e. religious identity), and study the effect of the treatment on political preferences and factual beliefs. This priming experiment tests the theoretical model of political stereotypes developed in “Identity Beliefs and Political Conflict”. We have collected the data and preliminary analysis is consistent with the model predictions. We are in the process of writing down the manuscript and submitting it to a leading journal. This project has used the resources of the grant to conduct online experiments and to hire collaborators helping us with the data analysis.

Finally, the research on the role of psychology and stereotypes has led the research team to develop additional hypotheses on how salient features affect a broad range of people’s attitudes, including toward risk taking and long term investments. We have conducted some experiment to test these predictions, and found very good support for them. These results will also be included on one or two manuscript that will be written and submitted in the fall. Also in this case, the resources of the grant have been used to conduct online experiments and analyze the data. Frieder Neunhoeffer has intensely worked on this part, too.