Bounded Rationality and Public Policy (eBook)

Preface 7
Contents 10
List of Tables 14
List of Figures 15
1 Introduction 17
Merit Wants 19
The Link Between Bounded Rationality and Merit Wants 19
Other-Regarding Behaviour and Expressive Preferences 20
Definitions 21
Frames 22
Frames and Welfare 24
Uncertainty and Information Processing 26
Merit Goods 27
Main Points 29
2 Anomalies 33
Introduction 33
The Reliability of the Evidence 34
Reference Dependent Preferences 38
Organising the Evidence 48
Prospect Theory -- Cumulative and Riskless 49
Mental Accounting 55
Preference Reversal 60
Conclusions 63
3 Information, Learning and Markets 65
Introduction 65
Probabilities, Information Processing and Bayes' Theorem 66
Representativeness and Availability Biases 66
Adjustment and Anchoring 67
Confirmation Biases 70
Ambiguity Aversion and the Ellsberg Paradox 72
Summing Up Bayes' Theorem 74
How Markets Might Lead to Individually Rational Behaviour 74
Summing Up Market Learning 80
Learning 81
Melioration 85
Conclusions 89
4 Markets and Reference Dependent Preferences 90
Introduction 90
Partial Competitive Equilibrium 91
Imperfect Competition 95
General Equilibrium 98
Reference Dependent Preferences 100
Equilibrium and General Equilibrium 102
Discussion 105
Conclusions 106
5 Welfare 108
Introduction 108
Frames and Paretian Welfare Economics 110
Responses to the Evidence 115
Switch Theories 115
Allow Individual Welfare to be Frame Dependent 116
No Ordering 117
Optimal or Golden Frames 118
Markets and Referenda as Optimal Frames 120
Information Aggregation 123
Extra-Preference Information -- Relaxing WEF 126
Bayesian 127
Paternalism 129
The Justification of Paternalistic Intervention 129
Paternalism: The Contractarian View 136
Summing Up 137
Ranking Frames Using Consent and Other Arguments from Paternalism 138
Hypothetical Rational Consent 142
Contractarian Consent 143
Conclusions 145
6 Public Policy and Bounded Rationality 147
Introduction 147
Bounded Rationality: Identification and Valued Added 147
Market Failure 152
Asymmetric Information 153
Near-Optimality 153
The Boundaries of the State 156
Voting for the Nanny State: Regulation of Markets by Self Aware Consumers 162
Political Economy -- An Illustration 165
Efficiency and Bias 166
Term Limits 169
Candidacy 170
Conclusions: Possible Worlds 173
Appendix 174
7 Standard Fiscal Policy and Merit Wants 176
Introduction 176
Individualistic Welfare Functions, Private Failure 177
Individualistic Welfare Functions, Public Failure 180
Two Spurious Categories of Merit Wants 181
Non-individualistic Welfare Functions 182
Objective Functions 183
Risk and Uncertainty 185
Optimal Policies 185
Wrong Information Models 192
Limits of the Literature 192
The Value of Information 193
The Value of Misinformation 196
Conclusion 198
8 Agency and Dependency 200
Introduction 200
Dependency Relationships: Children 202
The Child's Development of Economic Ideas 203
The Role of the State 204
Relief from Duty 205
Information Asymmetry 206
Regulating Care with Asymmetric Information 208
9 Tax Policy 220
Introduction 220
Monotonicity 220
Technical Efficiency -- Marketed Goods 221
Technical Efficiency -- Non-Marketed Goods 224
Cost Minimization 224
Summary 226
Tax Reform Issues and Loss Aversion 226
The Problems Created by Reference Dependent Preferences 226
Extensions to Consumer Theory 229
Implications of the Theory for Welfare Economics 231
Implications of the Theory for Tax Reform Models 233
Optimal Taxation 234
Final Thoughts 236
Conclusions 237
10 Framing Matters: Non-Standard Fiscal Policy 240
Introduction 240
Creating Mental Accounts 241
Theory 242
Intertemporal Issues: Pensions and Savings Policy 249
Intertemporal Choice and Self-Control 250
Regulating the Framing of Savings and Pensions Choices 255
Planning Ahead 258
The Framing of Tax Policies 262
Tax Evasion 264
Labour Supply and Tax Framing 265
Conclusion 269
11 Stated Preference and Non-Market Decisions 271
Introduction 271
A Formal Approach to Optimal Decisions 275
Part-Whole and Scope Effects 277
Elicitation Effects 279
Responding to Anomalies 282
Formal Comparison 287
Example 1: WTA Versus WTP 290
Example 2: Elicitation Methods 293
Summing Up 294
References 296
Index 324