Rational ignorance, rational voter expectations, and public policy: A discrete informational foundation for fiscal illusion

This paper demonstrates that rational ignorance, properly defined, allows t he possibility that fiscal illusion affects policies in a democracy. The im plications of rational ignorance are examined in a setting where voters are assumed to completely understand the fiscal environment and make perfect u se of any information that they possess. In this setting, it is demonstrate d that ignorance may be rational. manipulated, and generate biased expectat ions over fiscal parameters. The analysis suggests that the electoral impact of voter ignorance is reduc ed, but not eliminated by electoral competition. Candidate positions only a ffect the electoral choices of individuals who are at least partially infor med about those positions. Consequently electoral competition tends to gene rate policies that advance the interests of relatively informed voters. Thi s implies that election based public policies are based upon better informa tion than one would expect based on the widespread fiscal ignorance reporte d 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 an d governmental services which can not be unbiased if areas of ignorance rem ain - even if voters make the very best use of information in their possess ion. The existence of rational ignorance, once carefully defined, is suffic ient to generate policy relevant fiscal illusion.