A Behavioral Foundation for Audience Costs

We provide a behavioral foundation for audience costs by augmenting the canonical crisis bargaining model with voters who evaluate material outcomes relative to an endogenous reference point. Voters are more likely to re-elect their leader when their payoff is higher than this reference point, and they are more likely to replace him when it is lower. Backing down after a challenge may be politically costly to the leader because initiating the challenge has the potential to raise voters' expectations about their final payoff, creating the possibility that they suffer a payoff loss from disappointment when the leader backs down. Whether it is costly or beneficial to back down after a challenge (and just how costly or beneficial it is) depends on the reference point, which is determined in equilibrium.