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Optimal Paternalism in a Population With Bounded Rationality (WP-23-21)

Charles F. Manski and Eytan Sheshinski

A central mission of public economics has been to determine policies that optimize utilitarian welfare. To improve the realism of policy evaluation, it is desirable to enrich understanding of behavior and develop methods of analysis that use the enriched understanding to assess policies. Attention has been given to recognition that behavior may be boundedly rational, but little has been done to draw the implications of this work for mechanism design. Behavioral economists have suggested that planners should limit the choices available to individuals or should frame the options in a manner thought to influence choice, but the discussion has commonly been verbal and casual. Manski and Sheshinski formally consider a planner who has the power to design a discrete choice set from which individuals will choose. They suppose that individuals may be boundedly rational and, hence, may not maximize utility. Their concern is realistic settings in which persons have heterogeneous preferences and may vary in how their choices deviate from utility maximization. The researchers find that optimal paternalism is subtle. The policy that most effectively constrains or influences individual choices depends on the distribution of preferences and the choice probabilities measuring the extent to which persons behave suboptimally, conditional on their preferences.

Charles F. Manski, Board of Trustees Professor in Economics and IPR Fellow, Northwestern University

Eytan Sheshinski, Sir Isaac Wolfson Professor of Public Finance Emeritus, Hebrew University of Jerusalem

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