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Behavioural Decisions and Welfare

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  • Dalton, Patricio

    (Department of Economics, University of Warwick)

  • Ghosal, Sayantan

    (Department of Economics, University of Warwick)

Abstract

We study decision problems where (a) preference parameters are defined to include psychological/moral considerations and (b) there is a feedback effect from chosen actions to preference parameters. In a standard decision problem the chosen action is required to be optimal when the feedback effect from actions to preference parameters is fully taken into account. In a behavioural decision problem the chosen action is optimal taking preference parameters as given although chosen actions and preference parameters are required to be mutually consistent. Our framework unifes seemingly disconnected papers in the literature. We characterize the conditions under which behavioural and standard decisions problems are indistinguishable : in smooth settings, the two decision problems are generically distinguishable. We show that in general, revealed preferences cannot be used for making welfare judgements and we characterize the conditions under which they can inform welfare analysis. We provide an existence result for the case of incomplete preferences. We suggest novel implications for policy and welfare analysis.

Suggested Citation

  • Dalton, Patricio & Ghosal, Sayantan, 2008. "Behavioural Decisions and Welfare," The Warwick Economics Research Paper Series (TWERPS) 834, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:834
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    Cited by:

    1. Dalton, Patricio S. & Ghosal, Sayantan, 2013. "Characterizing Behavioral Decisions with Choice Datas," SIRE Discussion Papers 2013-86, Scottish Institute for Research in Economics (SIRE).
    2. Patricio Dalton & Sayantan Ghosal, 2012. "Decisions with endogenous frames," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(4), pages 585-600, April.
    3. B. Douglas Bernheim, 2009. "Behavioral Welfare Economics," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 267-319, 04-05.
    4. Patricio S. Dalton & Sayantan Ghosal, 2011. "Behavioral Decisions and Policy," CESifo Economic Studies, CESifo Group, vol. 57(4), pages 560-580, December.
    5. Marc Fleurbaey & Erik Schokkaert, 2013. "Behavioral Welfare Economics and Redistribution," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 180-205, August.
    6. Patricio S. Dalton & Sayantan Ghosal & Anandi Mani, 2016. "Poverty and Aspirations Failure," Economic Journal, Royal Economic Society, vol. 126(590), pages 165-188, February.
    7. Peter Kooreman & Henriëtte Prast, 2010. "What Does Behavioral Economics Mean for Policy? Challenges to Savings and Health Policies in the Netherlands," De Economist, Springer, vol. 158(2), pages 101-122, June.
    8. Paola Manzini & Marco Mariotti, 2015. "State dependent choice," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(2), pages 239-268, September.
    9. Dalton, P.S. & Ghosal, S., 2010. "Decisions with Endogenous Frames (Replaces CentER DP 2010-21)," Other publications TiSEM c4b257a4-972b-4e4b-a68e-8, Tilburg University, School of Economics and Management.
    10. Robin Maialeh, 2019. "Generalization of results and neoclassical rationality: unresolved controversies of behavioural economics methodology," Quality & Quantity: International Journal of Methodology, Springer, vol. 53(4), pages 1743-1761, July.
    11. FLEURBAEY, Marc & SCHOKKAERT, Erik, 2011. "Behavioral fair social choice," LIDAM Discussion Papers CORE 2011043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Manzini, Paola & Mariotti, Marco, 2010. "Moody Choice," IZA Discussion Papers 5005, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Decisions ; psychology ; indistinguishability ; revealed preferences ; welfare ; existence ; aspirations;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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