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Paternalism and Pseudo-Rationality

Author

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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 partial substitute for household optimization and that this is still true when households have private in- formation about their preferences. We illustrate a novel identification problem: some aggregate equilibrium properties that are implied by household optimization are also implied by planner optimization. A rational utilitarian planner enacts policies that cause the Euler equation to hold on average in a population of non-optimizing households, which we refer to as pseudo-rationality. Hence, widely studied allocative optimality conditions also arise in an allocatively inefficient economy with a rational planner, who uses tools such as default savings and Social Security to influence the consumption choices of myopic and passive households. Accordingly, aggregate classical optimization tests implemented with data from economies with paternalistic governments cannot reveal whether households would make optimal decisions on their own.

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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    File URL: http://www.nber.org/papers/w23620.pdf
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    References listed on IDEAS

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    1. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2003. "Optimal Defaults," American Economic Review, American Economic Association, vol. 93(2), pages 180-185, May.
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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.
    2. Melvin Stephens Jr. & Desmond Toohey, 2018. "Changes in Nutrient Intake at Retirement," NBER Working Papers 24621, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • H00 - Public Economics - - General - - - General

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