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Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model

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  • Eytan Sheshinski

Abstract

When individuals choose from whatever alternatives available to them the one that maximizes their utility then it is always desirable that the government provide them with as many alternatives as possible. Individuals, however, do not always choose what is best for them and their mistakes may be exacerbated by the availability of options. We analyze self-selection models, when individuals know more about themselves than it is possible for governments to know, and show that it may be socially optimal to limit and sometimes to eliminate individual choice. As an example, we apply Luce’s (1959) model of random choice to a work-retirement decision model and show that the optimal provision of choice is positively related to the degree of heterogeneity in the population and that even with very small degrees of non-rationality it may be optimal not to provide individuals any choice.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 868.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_868

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Keywords: logit; self-selection; moral-hazard; retirement;

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  1. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  3. Mirrlees, James A., 1987. "Economic Policy and Nonrational Behavior," Department of Economics, Working Paper Series qt9tw447ws, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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Cited by:
  1. Mattsson, Lars-Göran & Voorneveld, Mark & Weibull, Jörgen W., 2004. "Better may be worse: Some monotonicity results and paradoxes in discrete choice," Working Paper Series in Economics and Finance 558, Stockholm School of Economics, revised 21 Apr 2004.
  2. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
  3. Ira N. Gang & Gil S. Epstein, 2002. "Government and Cities: Contests and the Decentralization of Decision Making," Departmental Working Papers 200215, Rutgers University, Department of Economics.
  4. Kanbur, Ravi & Pirttila, Jukka & Tuomala, Matti, 2004. "Non-Welfarist Optimal Taxation And Behavioral Public Economics," Working Papers 127150, Cornell University, Department of Applied Economics and Management.
  5. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
  6. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
  7. Tyson, Christopher J., 2008. "Cognitive constraints, contraction consistency, and the satisficing criterion," Journal of Economic Theory, Elsevier, vol. 138(1), pages 51-70, January.
  8. Saint-Paul, Gilles, 2012. "Liberté et société post-utilitariste," IDEI Working Papers 745, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. repec:hal:wpaper:halshs-00732424 is not listed on IDEAS
  10. Christopher Tyson, 2005. "Axiomatic Foundations for Satisficing Behavior," Economics Series Working Papers 2005-W03, University of Oxford, Department of Economics.
  11. Jörgen Weibull & Lars-Göran Mattsson & Mark Voorneveld, 2007. "Better May be Worse: Some Monotonicity Results and Paradoxes in Discrete Choice Under Uncertainty," Theory and Decision, Springer, vol. 63(2), pages 121-151, September.

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