Evaluating political decision makers: With the benefit of hindsight bias?∗

In this paper we investigate the effects of biased decision evaluation in a simple two-period political agency model. We assume that voters are subjected to hindsight bias in their judgment about a politician’s ability to take appropriate decisions. High ability is defined as an informational advantage over voters as to the welfare maximizing policy, creating incentives for low-ability politicians to deviate from the optimal policy choice in an attempt to be perceived as possessing superior private information. We model hindsight bias as a cognitive deficiency (imperfect memory) which makes voters, to a certain extent, immune to surprises. We show that hindsight biased policy evaluation acts as a discipline device for low-ability politicians and, under certain conditions, increases political turnover compared to fully rational evaluation. These insights may be relevant to other principal-agent relationships in which hindsight bias cannot be eliminated through explicit ex ante contracts, e.g. promotion decisions in organizations.