Rational Ignorance, Rational Voter Expectations, and Public Policy: A Discrete Informational Foundation for Fiscal Illusion

Abstract

This paper demonstrates that rational ignorance, properly defined, allows the possibility that fiscal illusion affects policies in a democracy. The implications of rational ignorance are examined in a setting where voters are assumed to completely understand the fiscal environment and make perfect use of any information that they possess. In this setting, it is demonstrated that ignorance may be rational, manipulated, and generate biased expectations over fiscal parameters.

The analysis suggests that the electoral impact of voter ignorance is reduced, but not eliminated by electoral competition. Candidate positions only affect the electoral choices of individuals who are at least partially informed about those positions. Consequently electoral competition tends to generate policies that advance the interests of relatively informed voters. This implies that election based public policies are based upon better information than one would expect based on the widespread fiscal ignorance reported in surveys.

However, even in this setting, the votes cast and the policies adopted are affected by the estimated marginal rates of substitution between private and governmental services which can not be unbiased if areas of ignorance remain — even if voters make the very best use of information in their possession. The existence of rational ignorance, once carefully defined, is sufficient to generate policy relevant fiscal illusion.