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Markets vs. Government when Rationality Is Unequally Bounded: Some Consequences of Cognitive Inequalities for Theory and Policy

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  • Pelikan, Pavel

    (Prague University of Economics and The Ratio Institute)

Abstract

Recognizing that human rationality has bounds that are unequal across individuals entails treating it as a special scarce resource, tied to individuals and used for deciding on its own uses. This causes a meta-mathematical difficulty to the axiomatic theories of human capital and resource allocation, and raises a new problem for comparative institutional analysis, allowing it to explain some so far little understood differences between markets and government. The policy implications strengthen the case against national planning, selective industrial policies, and government ownership of enterprises, but weaken the case against paternalism.

Suggested Citation

  • Pelikan, Pavel, 2006. "Markets vs. Government when Rationality Is Unequally Bounded: Some Consequences of Cognitive Inequalities for Theory and Policy," Ratio Working Papers 85, The Ratio Institute, revised 03 Sep 2006.
  • Handle: RePEc:hhs:ratioi:0085
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    References listed on IDEAS

    as
    1. Pelikan, Pavel, 1997. "Allocation of Economic Competence in Teams: A Comparative Institutional Analysis," Working Paper Series 480, Research Institute of Industrial Economics.
    2. Pelikan, Pavel, 1989. "Evolution, economic competence, and the market for corporate control," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 279-303, December.
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    4. Pranab Bardhan & John E. Roemer, 1992. "Market Socialism: A Case for Rejuvenation," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 101-116, Summer.
    5. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, vol. 93(2), pages 175-179, May.
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    8. Sugden, Robert, 1991. "Rational Choice: A Survey of Contributions from Economics and Philosophy," Economic Journal, Royal Economic Society, vol. 101(407), pages 751-785, July.
    9. Viktor Vanberg, 2004. "The rationality postulate in economics: its ambiguity, its deficiency and its evolutionary alternative," Journal of Economic Methodology, Taylor & Francis Journals, vol. 11(1), pages 1-29.
    10. Boland, Lawrence A, 1981. "On the Futility of Criticizing the Neoclassical Maximization Hypothesis," American Economic Review, American Economic Association, vol. 71(5), pages 1031-1036, December.
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    14. Pelikan, Pavel, 2003. "Bringing Institutions Into Evolutionary Economics: Another View with Links to Changes in Physical and Social Technologies," Ratio Working Papers 24, The Ratio Institute.
    15. Sidney G. Winter, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, Oxford University Press, vol. 85(2), pages 237-261.
    16. Edward L. Glaeser, 2005. "Paternalism and Psychology," Harvard Institute of Economic Research Working Papers 2097, Harvard - Institute of Economic Research.
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    More about this item

    Keywords

    Rationality; meta-mathematics; institutions; markets; government;

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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