IDEAS home Printed from https://ideas.repec.org/a/spr/specre/v6y2004i2p97-105.html
   My bibliography  Save this article

Policy consequences of limited cognitive ability

Author

Listed:
  • Gilles Saint-Paul

    ()

Abstract

This paper analyses the welfare effects of price restrictions on private contracting in a world where agents have a limited cognitive ability. We deal with that by assuming that people compute the costs and benefits of entering a transaction with an error. We first discuss an example of an auction that will attract the least efficient buyers, because these are those who have made the largest mistake. We then study the case for government intervention when 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. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Gilles Saint-Paul, 2004. "Policy consequences of limited cognitive ability," Spanish Economic Review, Springer;Spanish Economic Association, vol. 6(2), pages 97-105, July.
  • Handle: RePEc:spr:specre:v:6:y:2004:i:2:p:97-105
    DOI: 10.1007/s10108-004-0080-8
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10108-004-0080-8
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:specre:v:6:y:2004:i:2:p:97-105. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.