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Bounded Rationality and Socially Optimal Limits on Choice in A Self-Selection Model

  • Sheshinski, Eytan

When individuals choose from whatever alternatives available to them the one that maximizes their utility then it is always desirable that the government provide them with as many alternatives as possible. Individuals, however, do not always choose what is best for them and their mistakes may be exacerbated by the availability of options. We analyze self-selection models, when individuals know more about themselves than it is possible for governments to know, and show that it may be socially optimal to limit and sometimes to eliminate individual choice. As an example, we apply Luce’s (1959) model of random choice to a work-retirement decision model and show that the optimal provision of choice is positively related to the degree of heterogeneity in the population and that even with very small degrees of non-rationality it may be optimal not to provide individuals any choice.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 56141.

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Date of creation: Jan 2000
Date of revision: Nov 2002
Handle: RePEc:pra:mprapa:56141
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  1. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  3. Mirrlees, James A., 1987. "Economic Policy and Nonrational Behavior," Department of Economics, Working Paper Series qt9tw447ws, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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