Cognitive Ability and Paternalism
AbstractThis paper analyses the welfare effects of price restrictions on private contracting in a world where agents have a limited cognitive ability. People compute the costs and benefits of entering a transaction with an error. The government knows the distribution of true costs and benefits as well as that of errors. By imposing constraints on transaction prices, the government eliminates some that are on average inefficient--because the price signals that one of the parties has typically grossly overestimated its benefit from participation. This policy may increase aggregate welfare even though some of the transactions being blocked are actually efficient. The paper also studies the extent to which the use of private consultants with sufficient intelligence by people with limited intelligence may dominate government regulation.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 609.
Length: 33 pages
Date of creation: Oct 2002
Date of revision:
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Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
- J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- J8 - Labor and Demographic Economics - - Labor Standards
- K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
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- Larsen, Birthe, 2004. "Skill level, Cognitive Ability, Unemployment and Welfare," Working Papers 17-2004, Copenhagen Business School, Department of Economics.
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