Erik Lakomaa

According to a hypothesis derived from prospect theory, the cognitive bias of loss aversion would make voters more likely to punish the governing majority if taxes are increased faster than the growth of the economy, i.e. if they are worse off in absolute terms. This hypothesis was examined using panel data regressions on data from a new and extensive database over Swedish municipal elections, and tax rates, from 1976 to 2002. It was found that a governing majority loses on average 2.5 percentage points of voter support if such tax hikes take place. At the same time, the unemployment rate, the inflation rate, the tax rate or smaller tax hikes, did not have any significant impact on voter behavior. This lends support to the assumptions that small tax hikes are "free" in terms of voter support and might explain why the high-tax welfare state has been possible and provides an example of an area where insights from Economic Psychology supplement traditional Public Choice theory.

In 1992 a large portion of the public elder care in Sweden was transferred from the counties to the municipalities, the so called Ädel Reform. Although there was a wide-spread consensus among politicians about the necessity of the reform, the process took some 30 years. Traditional economic theories might be less suitable for explaining both the slow process and the outcome of the reform. In this paper insights from economic psychology are used as an improvement on more traditional economic theories. This paper covers the political process that preceded the reform, an evaluation of the economic consequences of the reform and an attempt to explain some of the particularities of the reform using economic psychological theories.

Classic Public Choice theory has been very important in explaining various political phenomena. Incorporating insights from behavioral economics could possibly improve the analysis of the shape and function of political institutions.Even if institutions are fundamental in the analysis of policy-making they are often taken as given. Phenomena from behavioral economics such as self-servingbiases, loss aversion, encompassing sentiment coordination, status quo bias, endowment effect and framing should have good potential however provide an explanation for the shape of institutions. A common result of these phenomena on policy is Path Dependence, which is consistent with institutional theory. In this paper, the foundations of such a behavioral model are outlined and some areas in the domain of tax and welfare policy where the model can be applied are suggested.