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

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  • Sheshinski, Eytan
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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://mpra.ub.uni-muenchen.de/56141/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 56141.

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    Date of creation: Jan 2000
    Date of revision: Nov 2002
    Handle: RePEc:pra:mprapa:56141

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    Related research

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

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    1. James A. Mirrlees., 1987. "Economic Policy and Nonrational Behaviour," Economics Working Papers, University of California at Berkeley 8728, University of California at Berkeley.
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    Cited by:
    1. Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
    2. Manuel Amador & George-Marios Angeletos & Ivan Werning, 2004. "Commitment vs. Flexibility," 2004 Meeting Papers, Society for Economic Dynamics 87, Society for Economic Dynamics.
    3. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 90(10-11), pages 1825-1849, November.
    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, Springer, vol. 63(2), pages 121-151, September.

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