Optimal Compulsion when Behavioral Biases vary and the State Errs
When behavioral biases have varying sizes, and the State seeks to correct behavior through compulsion, the question is how to design optimal compulsion. One argument is that compulsion should rise with the size of the bias to be "cured". A contrary argument is that since compulsion affects actions, and recommended actions are independent from the bias, compulsion should not depend on the bias. This puzzle is solved for the case where individuals are affected by a bias that leads them to under-save, acknowledging that the planner predicts each individual's optimal action with error. Since only low-bias individuals are willing to correct the planner's mistakes when mandated to save too little, but are not able to do so in the opposite direction due to a costly spread, the optimal amount of compulsion rises with the bias. As an application, the paper explores a behavioral rationale for a Maximum for Taxable Earnings (MTE). It finds that if (1) the State's information is limited to current earnings; (2) earnings do not influence the earnings ratio for old age; and (3) the bias falls only at the highest earnings quintile, then a MTE near the 80th percentile of the earnings distribution is optimal.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: Avda. Vicuña Mackenna 4860, Macul, Santiago|
Phone: (562) 354-4303
Fax: (562) 553-1664
Web page: http://www.economia.uc.cl
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Homburg, Stefan, 2000. "Compulsory savings in the welfare state," Journal of Public Economics, Elsevier, vol. 77(2), pages 233-239, August.
When requesting a correction, please mention this item's handle: RePEc:ioe:doctra:389. 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: (Jaime Casassus)
If references are entirely missing, you can add them using this form.