Voter Understanding of Policy Incidence - Experimental Evidence

Abstract: We experimentally investigate whether and how people understand the incidence of policy. People’s understanding of markets likely influences the political viability of different regulations, taxes, subsidies, mandates and standards in policy applications ranging from innovation, technology, environmental protection to public finance. One application is the acceptance of potentially risky new technologies. Whether a new technology (e.g. autonomous cars or GMOs) will be allowed is likely to depend on the public perception of its benefits. For example, a naïve public might think that technologies that lower production costs benefit only “big business” neglecting to anticipate that in competitive equilibrium they might get the lion’s share of the cost reduction via lower prices. This could lead the public to reject technologies from whose adoption it would benefit. Another application is the continuing popularity of environmental command-and-control regulations (e.g. emissions standards) over directly targeting emissions (e.g. a carbon tax). Economic theory and empirical evidence both suggest that the latter can achieve a multiple of the reductions of emissions at the same cost. To gain insight into whether people understand markets, and if not what the nature of their misunderstanding is, and under what circumstances it arises we have designed a lab experiment. Our incentivized market and "voting" experiments are complemented by survey questions about subjects’ understanding of real-world markets, and their preferences regarding different new technologies as well as their beliefs about the distributional impact of environmental taxes and regulations.