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Behavioral Decisions and Policy

  • Patricio S. Dalton
  • Sayantan Ghosal

We study the public policy implications of a model in which agents do not fully internalize all the conscequences of their actions. Such a model unifies seemingly disconected models with behavioral agents. We evaluate the scope of paternalistic and libertarian-parternalistic policies in light of our model, and propose an alternative policy approach, labeled soft-libertarian, which enables decision makers to internalize the conscequences of their actions. Psychotherapy is one example of a soft-libertarian policy. Moreover, we show that in our behavioral framework, policies that increase the set of opportunities or provide more information to the agent may no longer be individual welfare improving. (JEL codes: D03, D04, D60, I38) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/cesifo/ifr015
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Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 57 (2011)
Issue (Month): 4 (December)
Pages: 560-580

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Handle: RePEc:oup:cesifo:v:57:y:2011:i:4:p:560-580
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  1. Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2002. "Projection Bias in Predicting Future Utility," Working Papers 02-11, Cornell University, Center for Analytic Economics.
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  4. Dalton, Patricio & Ghosal, Sayantan, 2008. "Behavioural Decisions and Welfare," The Warwick Economics Research Paper Series (TWERPS) 834, University of Warwick, Department of Economics.
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  6. Peter Kooreman & Henriëtte Prast, 2010. "What Does Behavioral Economics Mean for Policy? Challenges to Savings and Health Policies in the Netherlands," De Economist, Springer, vol. 158(2), pages 101-122, June.
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  14. Dalton, P.S. & Ghosal, S. & Mani, A., 2011. "Poverty and Aspirations Failure," Discussion Paper 2011-124, Tilburg University, Center for Economic Research.
  15. Loewenstein, George & Ubel, Peter A., 2008. "Hedonic adaptation and the role of decision and experience utility in public policy," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1795-1810, August.
  16. Hammond, Peter J., 1976. "Endogenous tastes and stable long-run choice," Journal of Economic Theory, Elsevier, vol. 13(2), pages 329-340, October.
  17. Geanakoplos, John & Pearce, David & Stacchetti, Ennio, 1989. "Psychological games and sequential rationality," Games and Economic Behavior, Elsevier, vol. 1(1), pages 60-79, March.
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  21. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
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