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The Political Economy Of Regulation In Markets With Naïve Consumers

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  • Patrick L. Warren
  • Daniel H. Wood

Abstract

In a model of a competitive industry selling base goods and add-ons, we investigate the conditions under which citizen-consumers will support policies that eliminate behavioral inefficiencies induced by naïve consumers. Unregulated competitive markets have two effects: they produce deadweight losses, and they redistribute income away from biased consumers. Both unbiased and naïve consumers believe that they benefit from this redistribution (the naïve consumers are wrong), so support for efficiency-improving regulation is limited. Extending our model to consumers with partial sophistication about their naïveté, we predict patterns of regulation consistent with the form and timing of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009.

Suggested Citation

  • Patrick L. Warren & Daniel H. Wood, 2014. "The Political Economy Of Regulation In Markets With Naïve Consumers," Journal of the European Economic Association, European Economic Association, vol. 12(6), pages 1617-1642, December.
  • Handle: RePEc:bla:jeurec:v:12:y:2014:i:6:p:1617-1642
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    File URL: http://hdl.handle.net/10.1111/jeea.12087
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    Cited by:

    1. Botond Köszegi, 2014. "Behavioral Contract Theory," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 1075-1118, December.
    2. Daniel Gottlieb & Kent Smetters, 2012. "Narrow Framing and Life Insurance," NBER Working Papers 18601, National Bureau of Economic Research, Inc.
    3. Schnellenbach, Jan & Schubert, Christian, 2015. "Behavioral political economy: A survey," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 395-417.

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