Thursday, August 9, 2018

Welfare in a behavioral world

This is a behavioral economics intensive week at Stanford, with the experimental SITE session just ended, and the Psychology and Economics session underway.

There are a lot of hard problems in behavioral economics: in some senses, it's harder to figure out what people may do if we aren't perfectly rational. But a particular problem is how we should take care of each other, if it isn't always clear how to evaluate someone's welfare.

For example, we had two talks in the earlier SITE session on paternalism--under what circumstances can we make people better off by giving someone else the power to make choices for them?  More generally, if people aren't always good at making choices, how can we tell what's good for them, i.e. how can we evaluate welfare?

Doug Bernheim and Dmitry Taubinsky tackle this question in a chapter in the forthcoming

Handbook  of  Behavioral  Economics,  Volume  1, edited by B.  Douglas  Bernheim,  Stefano  DellaVigna,  and  David  Laibson.

You can find it here as an NBER working paper:

Behavioral Public Economics
B. Douglas Bernheim, Dmitry Taubinsky
NBER Working Paper No. 24828
Issued in July 2018

"This chapter surveys work in behavioral public economics, emphasizing the normative implications of non-standard decision making for the design of welfare-improving and/or optimal policies. We highlight combinations of theoretical and empirical approaches that together can produce robust qualitative and quantitative prescriptions for optimal policy under a range of assumptions concerning consumer behavior. The chapter proceeds in four parts. First, we discuss the foundations and methods of behavioral welfare economics, focusing on choice-oriented approaches and the measurement of self-reported well-being. Second, we examine commodity taxes and related policies: we summarize research on optimal corrective taxes, the efficiency costs of sales taxes that are not fully salient, the distributional effects of sin taxes, the use of non-price policies such as nudges, the tax treatment of giving, and luxury taxes. Third, we examine policies affecting saving, including capital income taxation, commitment opportunities, default contribution provisions for pension plans, financial education, and mandatory saving programs. Fourth, we detail the manner in which under-provision of labor supply and misunderstandings of policy instruments impact optimal labor income taxation and social insurance. We close with some recommendations for future work in behavioral public economics."

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