Berentsen, Aleksander Bruegger, Esther Loertscher, Simon
Year of Publication:
WWZ Forschungsbericht 03/05
We consider a median voter model with uncertainty about how the economy functions. The distribution of income is exogenously given and the provision of a public good is financed through a proportional tax. Voters and politicians do not know the true production function for the public good, but by using Bayes rule they can learn from experience. We show that the economy may converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap.
Political economy Meltzer-Richard model Bayesian learning