Present-Biased Individuals, Optimal Paternalism, and Transfers in Kind
Present-biased preferences cause distortions in consumption that can motivate the use of paternalistic in-kind transfers. Empirically, goods are consumed to different degrees when consumption outlay changes. Economists distinguish between necessary goods and luxury goods. A present-biased individual has an intertemporal distortion of consumption toward the present, which in turn distorts present consumption toward luxury goods. In-kind transfers of necessary goods, such as food stamps, can alleviate the intertemporal distortion and make present-biased transfer recipients better off. Further, transfers in kind are asymmetrical in the sense that they can target present-biased recipients without affecting fully rational recipients.
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"Transfers in Kind: Why They Can Be Efficient and Nonpaternalistic,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1345-51, December.
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NBER Working Papers
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97-253, University of California at Berkeley.
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- Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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