Toward Choice-Theoretic Foundations for Behavioral Welfare Economics

Interest in behavioral economics has grown in recent years, stimulated largely by accumulating evidence that the standard model of consumer decision making provides an inadequate, positive description of human behavior. Behavioral models are increasingly finding their way into policy evaluation, which inevitably involves welfare analysis. No consensus concerning the appropriate standards and criteria for behavioral welfare analysis has emerged yet. This paper summarizes our effort to develop a unified framework for behavioral welfare economics (for a detailed discussion see Bernheim and Rangel 2007) — one that can be viewed as a natural extension of standard welfare economics. Standard welfare analysis is based on choice, not on utility or preferences. In its simplest form, it instructs the planner to respect the choices an individual would make for himself. The guiding normative principle is an extension of the libertarian deference to freedom of choice, which takes the view that it is better to give a person the thing he would choose for himself rather than something that someone else would choose for him. We show that it is possible to extend the standard choice-theoretic approach to welfare analysis to situations where individuals make inconsistent choices, which are prevalent in behavioral economics

Beyond revealed preference: choice-theoretic foundations for behavioral welfare economics

We propose a broad generalization of standard choice-theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models. Our approach exploits the coherent aspects of choice that those positive models typically attempt to capture. It replaces the standard revealed preference relation with an unambiguous choice relation: roughly, x is (strictly) unambiguously chosen over y (written xP*y) iff y is never chosen when x is available. Under weak assumptions, P* is acyclic and therefore suitable for welfare analysis; it is also the most discerning welfare criterion that never overrules choice. The resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories, with novel implications. Though not universally discerning, it lends itself to principled refinements

Fiscal Policy With Impure Intergenerational Altruism

Recent work demonstrates that dynastic assumptions guarantee the irrelevance of all redistributional polices, distortionary taxes, and prices--the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." In this paper, we investigate the possibility of reinstating approximate Ricardian equivalence. by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction my dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. Although this intuition turns out to be essentially correct, we show that models with small amounts of friction have other untenable implications. We conclude that the theoretical case for Ricardian equivalence remains tenuous.