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Optimal Policy to Influence Individual Choice Probabilities

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  • Sheshinski, Eytan

Abstract

This paper presents a model in which government may affect outcomes by manipulating individual choice probabilities through the design of the domain of choice or the use of fiscal instruments. Such manipulations are ineffective when individuals are perfectly rational, provided all alternatives are permitted. However, even a small deviation from perfect rationality is shown to call for policy that substantially manipulates choice probabilities. This policy aims to lend weight to alternatives preferred by individuals who are prone, more than others, to make mistakes. At very low levels of rationality, when choices are largely random, it is always socially optimal to entirely eliminate individual choice in order to prevent the errors generated by such choice. It is better to impose one alternative that is not the preferred one for some individuals instead of inducing a completely random draw by everybody.

Suggested Citation

  • Sheshinski, Eytan, 2003. "Optimal Policy to Influence Individual Choice Probabilities," MPRA Paper 55163, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:55163
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    File URL: https://mpra.ub.uni-muenchen.de/55163/1/MPRA_paper_55163.pdf
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    References listed on IDEAS

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    1. anonymous, 1960. "Book Reviews," Management Science, INFORMS, vol. 6(4), pages 498-505, July.
    2. anonymous, 1960. "Book Reviews," Management Science, INFORMS, vol. 7(1), pages 85-100, October.
    3. anonymous, 1960. "Book Reviews," Management Science, INFORMS, vol. 6(2), pages 205-214, January.
    4. anonymous, 1960. "Book Reviews," Management Science, INFORMS, vol. 6(3), pages 343-362, April.
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    Cited by:

    1. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2006. "Non-Welfarist Optimal Taxation And Behavioural Public Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 849-868, December.
    2. Haaparanta, Pertti & Pirttila, Jukka, 2007. "Reforms and confidence," Journal of Development Economics, Elsevier, vol. 84(1), pages 534-550, September.
    3. Xianhua Dai, 2011. "Optimal Taxation under Income Uncertainty," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 121-138, May.
    4. Carsten K. Nielsen, 2009. "Optimal economic institutions under rational overconfidence, with applications to the choice of exchange rate regime," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(4), pages 375-407, December.
    5. Jukka Pirttilä & Sanna Tenhunen, 2008. "Pawns and queens revisited: public provision of private goods when individuals make mistakes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(5), pages 599-619, October.
    6. Jörgen Weibull & Lars-Göran Mattsson & Mark Voorneveld, 2007. "Better May be Worse: Some Monotonicity Results and Paradoxes in Discrete Choice Under Uncertainty," Theory and Decision, Springer, vol. 63(2), pages 121-151, September.
    7. Nathan Berg & Gerd Gigerenzer, 2007. "Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 28(2), pages 337-359, February.

    More about this item

    Keywords

    logit model; default rules; private information;

    JEL classification:

    • H00 - Public Economics - - General - - - General

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