When Economic Disappointment Changes the Vote

In recent years, in many Western democracies — from the United States to the United Kingdom to Italy — right-wing populist parties have gained support among voters experiencing economic hardship. It's a seemingly paradoxical fact: these forces often propose programs that favor the wealthy, with lower taxes and less redistribution, yet they garner votes precisely among those left behind. And a national populism electorate is surprisingly heterogeneous, combining the disillusioned working-class and affluent voters. Hence the question we asked: Why does this happen, and what consequences does it have for economic policy?

The Disappointed, Risk-Lovers

To answer this question, in our article "The Political Implications of Reference-Dependent Preferences" in the Journal of the European Economic Association, we constructed a model of electoral competition based on an idea borrowed from economic psychology: people evaluate their income not in absolute terms, but in relation to a reference point, that is, what they expected to get. Those who fall below this threshold — "the disappointed" — experience an aversion to losses that, paradoxically, makes them risk-lovers for a gamble that offers the possibility of recovering lost economic ground.

In our model, two candidates compete for the vote by choosing how much to tax and redistribute. One is "moderate:" safe and predictable. The other is "populist:" riskier and less efficient, because they are inclined to unconventional policies with uncertain outcomes. Disappointed voters are attracted precisely by the populist’s intrinsic riskiness. But here the central mechanism comes into play: more redistribution reduces the disappointment of the poorest, bringing them closer to their reference point and thus making them less risk-loving — and less seduced by the populist candidate. The populist therefore has a weaker incentive than the moderate to promise high taxes, because increasing redistribution would make him lose some of the appeal on which his support is based.

Two Possible Equilibria

This trade-off leads to two possible equilibria. In the first, the two candidates converge on the same tax rate. In the second, more interestingly, the platforms diverge: the populist proposes lower taxes and less redistribution than the moderate. An "anomalous coalition" is thus formed: the populist collects the votes of the richest (attracted by low taxes) and the poorest and most disillusioned (attracted by political riskiness), while the moderate retains the support of those close to their point of reference — the most risk-averse voters, who fear they will lose significantly if the populist fails to win. The divergence emerges especially when the economic shock is large enough and the populist's inefficiency is sufficiently great.

A Model That Explains the Populist Right

Alongside the theoretical results, we offer some empirical evidence. First, we test the hypothesis that populist leaders are indeed riskier and less efficient: using the synthetic control method, across 27 instances of populist government in 18 countries, we find that populism in power reduces per capita GDP by about 9% and increases its volatility by circa 20%. Second, using European social surveys, we show that right-wing populist parties are indeed supported by an anomalous coalition: those reporting economic hardship are about 10 percentage points more likely to vote for them, but voters in the richest income quintile are also about 11 percentage points more likely to vote for populist right. Left-wing populists, by contrast, primarily attract the votes of the poorest: our theory explains right-wing populism, not the entire phenomenon across the political spectrum.

The Unprecedented Alliance

Ultimately, reference-dependent preferences help resolve an apparent paradox. After a strong shock, economic disappointment turns many voters into political risk-seekers, and this pushes the riskiest candidate to run on a low-tax platform, supported by an unprecedented alliance between the wealthy and those who feel they've lost everything.