This paper explores the role of identity in voters’ decision to retain corrupt politicians. We build up a model of electoral accountability with pure moral hazard and bring it to the lab. Politicians must decide whether to invest in a public project with uncertain returns or to keep the funds for themselves. Voters observe the outcome of the project but not the action of the politician; if the project is unsuccessful, they do not know whether it was because of bad luck or because the politician embezzled the funds. We run two treatments; a control and a treatment where subjects are assigned an identity using the minimal group paradigm. Our main result is that, upon observing a failed project, voters approve politicians of their same identity group significantly more often than in the control and compared to politicians of a different identity group. This is partially driven by a belief on same-identity politicians being more honest. We also observe that subjects acting as politicians embezzle funds less often than expected by the equilibrium prediction. 

In an investment trading game where the profitability of the new investment (the fundamental) is a random variable, entrepreneurs’ higher-order beliefs about the future asset price of the realised investment enter into their investment decisions. The financial market uses aggregate investment as a signal of the underlying fundamental. If agents have dispersed information, endogenous strategic complementarity in actions emerges owing to the information spillover and generates inefficiency in the economy. We introduce endogenous information acquisition and study what information is acquired and how it affects the equilibrium outcome. 

This paper studies the consequences of heterogeneous beliefs on voting behaviour and the welfare implications driven by them. I assume an asymmetric change in voters' beliefs about the ability of an incumbent and a challenger politician to govern after an implicit negative economic shock. Voters lose faith in the incumbent and trust an outsider challenger without prior office experience. We use a model of electoral competition and we show that the incumbent loses his power irrespective of the platform he proposes. Moreover, our welfare analysis shows that electoral competition may under-provide public goods compared to a utilitarian social planner, depending on the belief distribution regarding the challenger.

We introduce a general median voter model of linear taxation with voters having different valuations of public expenditure, according to their income. We also assume that preferences are not quasi-linear and we allow for distortive taxation. We focus our discussion on the welfare implications of these different assumptions separately and we see that competition might be inefficient even with a symmetric income distribution. Also, assuming an empirically relevant income distribution, competition might under-provide public goods and services. This comes in contrast with the well-known result of the literature, where competition over-provides public goods when assuming a rightly-skewed income distribution. We see that the welfare result in all cases depends mainly on the convexity or concavity of the marginal effects of taxation across the population.