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

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  • Eytan Sheshinski

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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.

Suggested Citation

  • Eytan Sheshinski, 2000. "Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model," Discussion Paper Series dp330, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem, revised Nov 2002.
  • Handle: RePEc:huj:dispap:dp330
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    References listed on IDEAS

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    1. Frankel, Jeffrey A., 1987. "The Impact of U.S. Economic Policies on a Commodity-Exporting Debtor: The Case of Thailand," Department of Economics, Working Paper Series qt35080885, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. James A. Mirrlees., 1987. "Economic Policy and Nonrational Behaviour," Economics Working Papers 8728, University of California at Berkeley.
    3. Joskow, Paul L & Rozanski, George A, 1979. "The Effects of Learning by Doing on Nuclear Plant Operating Reliability," The Review of Economics and Statistics, MIT Press, pages 161-168.
    4. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, pages 295-336.
    5. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, pages 1-23.
    6. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Citations

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    Cited by:

    1. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2006. "Non-Welfarist Optimal Taxation And Behavioural Public Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 849-868, December.
    2. Gilles Saint-Paul, 2012. "Liberté et société post-utilitariste," Revue française d'économie, Presses de Sciences-Po, pages 3-18.
    3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, pages 1145-1177.
    4. Epstein, Gil S & Gang, Ira, 2002. "Government and Cities: Contests and the Decentralization of Decision Making," CEPR Discussion Papers 3585, C.E.P.R. Discussion Papers.
    5. Tyson, Christopher J., 2008. "Cognitive constraints, contraction consistency, and the satisficing criterion," Journal of Economic Theory, Elsevier, pages 51-70.
    6. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, pages 1825-1849.
    7. Gil S Epstein, 2012. "Employer’s information and promotion-seeking activities," Economics and Business Letters, Oviedo University Press, pages 21-32.
    8. Manuel Amador & Iván Werning & George-Marios Angeletos, 2006. "Commitment vs. Flexibility," Econometrica, Econometric Society, pages 365-396.
    9. Mattsson, Lars-Göran & Voorneveld, Mark & Weibull, Jörgen W., 2004. "Better may be worse: Some monotonicity results and paradoxes in discrete choice," SSE/EFI Working Paper Series in Economics and Finance 558, Stockholm School of Economics, revised 13 Sep 2006.
    10. repec:hal:wpaper:halshs-00732424 is not listed on IDEAS
    11. 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, pages 121-151.
    12. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, pages 1825-1849.

    More about this item

    Keywords

    logit; self-selection; moral-hazard; retirement.;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H1 - Public Economics - - Structure and Scope of Government

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