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Paternalism and Pseudo-Rationality

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  • Itzik Fadlon
  • David Laibson

Abstract

Resource allocations are jointly determined by the actions of social planners and households. In this paper we highlight the distinction between planner optimization and household optimization. We show that planner optimization is a substitute for household optimization and that this is true even when there are information asymmetries, so that households know more about their preferences than planners. Our analysis illustrates the scope for mis-attribution in economic analysis. Are seemingly optimal allocations caused by optimizing households, or are such allocations caused by planners who paternalistically influence myopic and passive households? We show that widely studied allocative optimality conditions that are implied by household optimization also arise in an economy with a rational planner who uses tools such as default savings and Social Security to influence the choices of non-optimizing households. Many classical optimization conditions do not resolve the question of household optimization. Pseudo-rationality arises when rational planners elicit approximately optimal behavior from non-optimizing households.

Suggested Citation

  • Itzik Fadlon & David Laibson, 2017. "Paternalism and Pseudo-Rationality," NBER Working Papers 23620, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23620 Note: AG IFM PE
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    References listed on IDEAS

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    Cited by:

    1. Itzik Fadlon & Jessica Laird & Torben Heien Nielsen, 2016. "Do Employer Pension Contributions Reflect Employee Preferences? Evidence from a Retirement Savings Reform in Denmark," American Economic Journal: Applied Economics, American Economic Association, vol. 8(3), pages 196-216, July.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H0 - Public Economics - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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