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Regret and Regulation

Author

Listed:
  • Rachel J Huang

    (Graduate Institute of Finance, National Taiwan University of Science and Technology, #43, Sec. 4, Keelung Rd., Taipei 106, Taiwan.)

  • Alexander Muermann

    (Department of Finance, Accounting and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria.)

  • Larry Y Tzeng

    (Department of Finance, National Taiwan University, #1, Sec. 4, Roosevelt Rd., Taipei, 106 Taiwan.)

Abstract

We analyse the welfare effect of governmental regulation for individuals who consider anticipated regret in their decision-making process. Although governmental policies by directing choice, distort individual decisions in the private market, they can alleviate individuals’ pain associated with the feeling of regret. We analyse this trade-off and provide conditions under which the implied reduction of regret justifies regulation. Furthermore, we demonstrate our findings on tax deduction for non-insured losses, a well-studied social policy in insurance. Last, we consider heterogenous individuals and alternative social welfare functions and show that our results hold in these extended settings.

Suggested Citation

  • Rachel J Huang & Alexander Muermann & Larry Y Tzeng, 2014. "Regret and Regulation," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(1), pages 65-89, March.
    • Handle: RePEc:pal:genrir:v:39:y:2014:i:1:p:65-89
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    Citations

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    Cited by:

    1. Christian Gollier, 2020. "Aversion to risk of regret and preference for positively skewed risks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(4), pages 913-941, November.
    2. Zheng, Jiakun, 2021. "Willingness to pay for reductions in health risks under anticipated regret," Journal of Health Economics, Elsevier, vol. 78(C).
    3. Jiakun Zheng, 2021. "Willingness to pay for reductions in health risks under anticipated regret," Post-Print hal-04227414, HAL.
    4. Gollier, Christian, 2016. "Explaining rank-dependent utility with regret and rejoicing," IDEI Working Papers 863, Institut d'Économie Industrielle (IDEI), Toulouse.

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