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Paternalism and Pseudo-Rationality

Listed author(s):
  • Itzik Fadlon
  • David Laibson

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23620.

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Date of creation: Jul 2017
Handle: RePEc:nbr:nberwo:23620
Note: AG IFM PE
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