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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. James A. Mirrlees., 1987. "Economic Policy and Nonrational Behaviour," Economics Working Papers 8728, University of California at Berkeley.
  2. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  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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Cited by:
  1. Saint-Paul, Gilles, 2012. "Liberté et société post-utilitariste," IDEI Working Papers 745, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. repec:hal:wpaper:halshs-00732424 is not listed on IDEAS
  3. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2006. "Non-Welfarist Optimal Taxation And Behavioural Public Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 849-868, December.
  4. Christopher Tyson, 2005. "Axiomatic Foundations for Satisficing Behavior," Economics Series Working Papers 2005-W03, University of Oxford, Department of Economics.
  5. Manuel Amador & Iván Werning & George-Marios Angeletos, 2006. "Commitment vs. Flexibility," Econometrica, Econometric Society, vol. 74(2), pages 365-396, 03.
  6. Tyson, Christopher J., 2008. "Cognitive constraints, contraction consistency, and the satisficing criterion," Journal of Economic Theory, Elsevier, vol. 138(1), pages 51-70, January.
  7. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  8. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
  9. Epstein, Gil S. & Gang, Ira N., 2002. "Government and Cities: Contests and the Decentralization of Decision Making," IZA Discussion Papers 547, Institute for the Study of Labor (IZA).
  10. 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.
  11. 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.

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