Abstract
The debate about behavioral economics–the incorporation of insights from psychology into economics–is often framed as a question about the foundational assumptions of economic models. This paper presents a more pragmatic perspective on behavioral economics that focuses on its value for improving empirical predictions and policy decisions. I discuss three ways in which behavioral economics can contribute to public policy: by offering new policy tools, improving predictions about the effects of existing policies, and generating new welfare implications. I illustrate these contributions using applications to retirement savings, labor supply, and neighborhood choice. Behavioral models provide new tools to change behaviors such as savings rates and new counterfactuals to estimate the effects of policies such as income taxation. Behavioral models also provide new prescriptions for optimal policy that can be characterized in a non-paternalistic manner using methods analogous to those in neoclassical models. Model uncertainty does not justify using the neoclassical model; instead, it can provide a new rationale for using behavioral nudges. I conclude that incorporating behavioral features to the extent they help answer core economic questions may be more productive than viewing behavioral economics as a separate subfield that challenges the assumptions of neoclassical models.
Highlights
The debate about behavioral economics – the incorporation of insights from psychology into economics – is often framed as a question about the foundational assumptions of economic models
The debate about behavioral economics is often framed as a question about the foundational assumptions of neoclassical economics
Instead of posing the central research question as “are the assumptions of the neoclassical economic model valid?”, the pragmatic approach starts from a policy question – for example, “how can we increase savings rates?” – and incorporates behavioral factors to the extent that they improve empirical predictions and policy decisions
Summary
This section formalizes the implications of behavioral economics for public policy using a simple representative-agent model. If one can better explain the data in a relevant application by incorporating features such as inattention or reference dependence into the model of individual decisions v(c|n, d), there would be little justification for excluding these factors These modeling decisions are application-specific: for some applications (e.g., understanding the effects of income taxes on labor supply), a model featuring separable utility might yield perfectly reasonable predictions, and most economists would not insist on allowing for complementarity between consumption and labor in such cases. If agents have non-standard experienced utilities, such as reference-dependent preferences, the welfare consequences of policies naturally differ from the predictions one would obtain from a neoclassical model. The three sections of the paper illustrate these ideas more concretely in the context of such applications
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
