Paternalism and Pseudo-Rationality

Itzik Fadlon, David Laibson

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

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 substitute for household optimization and that this is true even when there are information asymmetries, so that households know more about their preferences than planners. Our analysis illustrates the scope for mis-attribution in economic analysis. Are seemingly optimal allocations caused by optimizing households, or are such allocations caused by planners who paternalistically influence myopic and passive households? We show that widely studied allocative optimality conditions that are implied by household optimization also arise in an economy with a rational planner who uses tools such as default savings and Social Security to influence the choices of non-optimizing households. Many classical optimization conditions do not resolve the question of household optimization. Pseudo-rationality arises when rational planners elicit approximately optimal behavior from non-optimizing households.

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Document Object Identifier (DOI): 10.3386/w23620

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