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

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  • Eytan Sheshinski

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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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File URL: http://ratio.huji.ac.il/sites/default/files/publications/dp330.pdf
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Bibliographic Info

Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp330.

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Length: 35 pages
Date of creation: Jan 2000
Date of revision: Nov 2002
Handle: RePEc:huj:dispap:dp330

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

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References

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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. 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.
  3. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
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Citations

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Cited by:
  1. 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.
  2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September.
  3. Gilles Saint-Paul, 2012. "Liberté et société post-utilitariste," Working Papers halshs-00732424, HAL.
  4. 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.
  5. Manuel Amador & George-Marios Angeletos & Ivan Werning, 2004. "Commitment vs. Flexibility," 2004 Meeting Papers 87, Society for Economic Dynamics.
  6. Epstein, Gil S & Gang, Ira, 2002. "Government and Cities: Contests and the Decentralization of Decision Making," CEPR Discussion Papers 3585, C.E.P.R. Discussion Papers.
  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. Gilles Saint-Paul, 2012. "Liberté et société post-utilitariste," PSE Working Papers halshs-00732424, HAL.
  9. 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.
  10. Ted O'Donoghue & Matthew Rabin, 2005. "Optimal Sin Taxes," Levine's Bibliography 784828000000000346, UCLA Department of Economics.
  11. Christopher Tyson, 2005. "Axiomatic Foundations for Satisficing Behavior," Economics Series Working Papers 2005-W03, University of Oxford, Department of Economics.

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