NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Paternalism and Pseudo-Rationality

Itzik Fadlon, David Laibson

NBER Working Paper No. 23620
Issued in July 2017, Revised in July 2019
NBER Program(s):The Program on Aging, The International Finance and Macroeconomics Program, The Public Economics Program

Resource allocations are jointly determined by the actions of social planners and households. In this paper, we highlight the distinction between planner optimization and household optimization. We show that planner optimization is a partial substitute for household optimization and that this is still true when households have private in- formation about their preferences. We illustrate a novel identification problem: some aggregate equilibrium properties that are implied by household optimization are also implied by planner optimization. A rational utilitarian planner enacts policies that cause the Euler equation to hold on average in a population of non-optimizing households, which we refer to as pseudo-rationality. Hence, widely studied allocative optimality conditions also arise in an allocatively inefficient economy with a rational planner, who uses tools such as default savings and Social Security to influence the consumption choices of myopic and passive households. Accordingly, aggregate classical optimization tests implemented with data from economies with paternalistic governments cannot reveal whether households would make optimal decisions on their own.

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Document Object Identifier (DOI): 10.3386/w23620

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