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Behavioral Public Economics

The standard economic approach to policy evaluation relies on the assumption of rational revealed preferences, which holds that people always choose what is best for them, that their choices do not depend on seemingly inconsequential frames, and that the preferences revealed by their choices are transitive and complete. Despite its centrality to modern Public Economics, this assumption may seem stringent from a psychological perspective. Indeed, the ostensible purpose of many important public policies is to address the concern that people do not always choose what is best for them, and that the determinants of consumer behavior extend beyond narrow self-interested optimization. For example, many countries have established government bureaus that offer consumer protection to guard against the possibility that firms may attempt to exploit unsophisticated buyers. A number of countries have also created “behavioral insights” teams, the role of which is to leverage findings from psychology and Behavioral Economics to formulate more effective government policies. Policy makers often justify otherwise standard policies such as “sin taxes” on cigarettes, alcohol, sugary drinks, and similar goods on the grounds that they discourage harmful behaviors. Arguments for mandatory retirement savings programs often reference consumer myopia.

The existence of such policies, as well as various empirical findings in Behavioral Economics, suggest that the standard approach in Public Economics to policy evaluation may yield misleading conclusions about the welfare effects of some policies, and is simply inapplicable to other policies that influence behavior through framing effects, such as those that determine salience. The rapidly expanding field of Behavioral Public Economics combines the methods and insights from Behavioral Economics and Public Economics to (i) supplement the Public-Economics toolbox with methods that allow for more robust evaluations of real-world policies, (ii) develop innovative policy tools, and (iii) explain why consumers’ responses to policy incentives are sometimes anomalous.

My recent work in this area involves applications of Behavioral Welfare Economics to specific policy issues. Some of the older papers listed below pre-date my work on Behavioral Welfare Economics, and consequently were not informed by the same set of tools. That work is what stimulated my interest the problem of policy evaluation with behavioral decision makers, and led me to develop a formal normative framework.


Behavioral Public Economics

This chapter surveys work in behavioral public economics, emphasizing the normative implications of non-standard decision making for the design of welfare-improving and/or optimal policies. We highlight combinations of theoretical and empirical approaches that together can produce robust qualitative and quantitative prescriptions for optimal policy under a range of assumptions concerning consumer behavior. The chapter proceeds in four parts.

Taxation and Saving: A Behavioral Perspective

In this paper, I argue that LCH has had an excessive influence on the design, conceptualization, and interpretation of theoretical and empirical studies of the relation between taxation and saving. While other behavioral hypotheses are mentioned in the literature with increasing frequency, this usually occurs in the course of explaining anomalous results, rather than in the context of evaluating policies, designing empirical strategies, or interpreting results that do not appear to be anomalous from a life-cycle perspective.

Optimal Default Options: The Case for Opt-Out Minimization

We examine the desirability of opt-out minimization, a well-known and simple rule of thumb for setting default options such as passively selected contribution rates in employee-directed pension plans. Existing results suggest that this strategy is welfare-optimal only under highly restrictive assumptions. In this paper, we dispense with those assumptions and demonstrate far more generally that opt-out minimization is approximately optimal. Our main results require only a small number of weak regularity conditions.


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