The cost of doing the right thing. A model of populism with rent-seeking politicians and the economic crisis

Populism can be described as the behaviour of politicians who choose a sub-optimal stance or policy in order to pander to the electorate and gather consensus. We model populism in a political agency framework and find the conditions for an honest and social welfare-maximising politician to act as populist in order to be re-elected. It turns out that the occurrence of populism hinges on the need to keep rent-seeking, corrupt, politicians away from power and, so, is more common where the share of corrupt politicians is large. We also prove that the populist equilibrium is more likely the worse are the economic conditions of the country, the larger are the rents to be captured by people in power and the less effective is economic policy to fight instability and economic crises.