Private Paternalism, the Commitment Puzzle, and Model-Free
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When Does Behavioural Economics Really Matter?
When does behavioural economics really matter? Ian McAuley, University of Canberra and Centre for Policy Development (www.cpd.org.au) Paper to accompany presentation to Behavioural Economics stream at Australian Economic Forum, August 2010. Summary Behavioural economics integrates the formal study of psychology, including social psychology, into economics. Its empirical base helps policy makers in understanding how economic actors behave in response to incentives in market transactions and in response to policy interventions. This paper commences with a short description of how behavioural economics fits into the general discipline of economics. The next section outlines the development of behavioural economics, including its development from considerations of individual psychology into the fields of neurology, social psychology and anthropology. It covers developments in general terms; there are excellent and by now well-known detailed descriptions of the specific findings of behavioural economics. The final section examines seven contemporary public policy issues with suggestions on how behavioural economics may help develop sound policy. In some cases Australian policy advisers are already using the findings of behavioural economics to advantage. It matters most of the time In public policy there is nothing novel about behavioural economics, but for a long time it has tended to be ignored in formal texts. Like Molière’s Monsieur Jourdain who was surprised to find he had been speaking prose all his life, economists have long been guided by implicit knowledge of behavioural economics, particularly in macroeconomics. Keynes, for example, understood perfectly the “money illusion” – people’s tendency to think of money in nominal rather than real terms – in his solution to unemployment. -
For Better Or for Worse: Default Effects and 401(K) Savings Behavior
This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Perspectives on the Economics of Aging Volume Author/Editor: David A. Wise, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-90305-2 Volume URL: http://www.nber.org/books/wise04-1 Conference Date: May 17-20, 2001 Publication Date: June 2004 Title: For Better or for Worse: Default Effects and 401(k) Savings Behavior Author: James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick URL: http://www.nber.org/chapters/c10341 2 For Better or for Worse Default Effects and 401(k) Savings Behavior James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick 2.1 Introduction Seemingly minor changes in the way a choice is framed to a decision maker can generate dramatic changes in behavior. Automatic enrollment provides a clear example of such effects. Under automatic enrollment (also called negative election), employees are automatically enrolled in their company’s 401(k) plan unless the employees elect to opt out of the plan. This contrasts with the usual arrangement in which employees must ac- tively choose to participate in their employer’s 401(k). Standard economic theory predicts that automatic enrollment should not influence the employee’s saving decision, because automatic enroll- ment does not change the economic fundamentals of the planning prob- lem. But several studies and anecdotal accounts suggest that automatic enrollment has succeeded in dramatically increasing 401(k) participa- James J. Choi is a Ph.D. candidate in economics at Harvard University. David Laibson is professor of economics at Harvard University and a research associate of the National Bu- reau of Economic Research. -
Restoring Rational Choice: the Challenge of Consumer Financial Regulation
NBER WORKING PAPER SERIES RESTORING RATIONAL CHOICE: THE CHALLENGE OF CONSUMER FINANCIAL REGULATION John Y. Campbell Working Paper 22025 http://www.nber.org/papers/w22025 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2016 This paper is the Ely Lecture delivered at the annual meeting of the American Economic Association on January 3, 2016. I thank the Sloan Foundation for financial support, and my coauthors Steffen Andersen, Cristian Badarinza, Laurent Calvet, Howell Jackson, Brigitte Madrian, Kasper Meisner Nielsen, Tarun Ramadorai, Benjamin Ranish, Paolo Sodini, and Peter Tufano for joint work that I draw upon here. I also thank Cristian Badarinza for his work with international survey data on household balance sheets, Laurent Bach, Laurent Calvet, and Paolo Sodini for sharing their results on Swedish wealth inequality, Ben Ranish for his analysis of Indian equity data, Annamaria Lusardi for her assistance with financial literacy survey data, Steven Bass, Sean Collins, Emily Gallagher, and Sarah Holden of ICI and Jack VanDerhei of EBRI for their assistance with data on US retirement savings, Eduardo Davila and Paul Rothstein for correspondence and discussions about behavioral welfare economics, and Daniel Fang for able research assistance. I have learned a great deal from my service on the Academic Research Council of the Consumer Financial Protection Bureau, and from conversations with CFPB staff. Finally I gratefully acknowledge insightful comments from participants in the Sixth Miami Behavioral -
ECON 1820: Behavioral Economics Spring 2015 Brown University Course Description Within Economics, the Standard Model of Be
ECON 1820: Behavioral Economics Spring 2015 Brown University Course Description Within economics, the standard model of behavior is that of a perfectly rational, self interested utility maximizer with unlimited cognitive resources. In many cases, this provides a good approximation to the types of behavior that economists are interested in. However, over the past 30 years, experimental and behavioral economists have documented ways in which the standard model is not just wrong, but is wrong in ways that are important for economic outcomes. Understanding these behaviors, and their implications, is one of the most exciting areas of current economic inquiry. The aim of this course is to provide a grounding in the main areas of study within behavioral economics, including temptation and self control, fairness and reciprocity, reference dependence, bounded rationality and choice under risk and uncertainty. For each area we will study three things: 1. The evidence that indicates that the standard economic model is missing some important behavior 2. The models that have been developed to capture these behaviors 3. Applications of these models to (for example) finance, labor and development economics As well as the standard lectures, homework assignments, exams and so on, you will be asked to participate in economic experiments, the data from which will be used to illustrate some of the principals in the course. There will also be a certain small degree of classroom ‘flipping’, with a portion of many lectures given over to group problem solving. Finally, an integral part of the course will be a research proposal that you must complete by the end of the course, outlining a novel piece of research that you would be interested in doing. -
Brigitte C. Madrian Curriculum Vitae February 2016
BRIGITTE C. MADRIAN CURRICULUM VITAE FEBRUARY 2016 CONTACT INFORMATION Harvard Kennedy School Phone: (617) 495-8917 Harvard University Fax: (617) 496-5960 79 John F. Kennedy Street e-mail: [email protected] Cambridge, MA 02138 EDUCATION 1993 Ph.D., Economics, Massachusetts Institute of Technology, Cambridge, MA 1989 M.A., Economics, Brigham Young University, Provo, UT 1989 B.A., Economics, Brigham Young University, Provo, UT CURRENT POSITIONS/AFFILIATIONS 2006-present Aetna Professor of Public Policy and Corporate Management, Kennedy School of Government, Harvard University 2016-present Consumer Financial Protection Bureau (CFPB) Academic Research Council 2016-present Vestigo Ventures Advisory Board 2015-present Editor, Review of Economics and Statistics 2015-present DoubleNet Pay Advisory Board 2014-present FINRA Board of Governors 2014-present Bipartisan Policy Center Personal Savings Initiative (commission member) 2013-present American Economic Association Committee on Economic Education 2013-present Center for Financial Studies (CFS) Research Advisory Council for the Center for Sustainable Architecture for Finance in Europe (SAFE) 2010-present Co-director, NBER Working Group on Household Finance 2010-present SSRN Household Finance eJournal Advisory Board 2010-present Wheatley Institution Fellow, Brigham Young University 2009-present Sloan/Sage Behavioral Economics and Consumer Finance Working Group 2007-present National Academy of Social Insurance 2010-present Editorial board, Journal of Pension Economics and Finance 2005-present -
Behavioral Economics Fischbacher 2009 2010
Behavioral Economics, Winter Term 2009/2010 Urs Fischbacher, [email protected] Mo 14-16 Uhr (G309) Neoclassical economic models rest on the assumptions of rationality and selfishness. Behavioral economics investigates departures from these assumptions and develops alternative models. In this lecture, we will discuss inconsistencies in intertemporal decisions, the role of reference points, money illusion and non-selfish behavior. We will analyze models that aim in a better description of actual human behavior. Content 19.10.2009 Introduction 26.10.2009 Intertemporal choice (β, δ ) preferences 02.11.2009 Consumption optimization 09.11.2009 Empirical tests 16.11.2009 Reference points Introduction 23.11.2009 Köszegi und Rabin (2006) 30.11.2009 Empirical tests 07.12.2009 Money Illusion 14.12.2009 Dual selfs Animal spirit model 21.12.2009 Non -selfish prefernces Introduction 11.01.2010 Social Preference Theories: Inequity Aversion 18.01.2010 Social Preference Theories: Reciprocity 25.01.2010 Testing Theories 01.02.2010 Field evidence 08.02.2010 Questions and Answers Main literature You find an entertaining introduction in behavioral economics in George A. Akerlof and Robert J. Shiller, 2009, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”, Princeton University Press, Princeton. We will focus on theoretical papers. The main papers are, in order of appearance: O’Donoghue, Ted and Matthew Rabin, 1999, “Doing it Now or Later,” American Economic Review, 89(1), 103-24. David Laibson, Andrea Repetto and Jeremy Tobacman (2003) “A Debt Puzzle” in eds. Philippe Aghion, Roman Frydman, Joseph Stiglitz, Michael Woodford, Knowledge, Information, and Expectations in Modern Economics: In Honor of Edmund S. -
David Laibson RAND Summer 2006
David Laibson RAND Summer 2006 All readings are recommended. Starred readings will be particularly useful complements for the lecture. George Akerlof "Procastination and Obedience," The Richard T. Ely Lecture, American Economic Review, Papers and Proceedings, May 1991. *George-Marios Angeletos, David Laibson, Andrea Repetto, Jeremy Tobacman and Stephen Weinberg,“The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation ” Journal of Economic Perspectives, August 2001, pp. 47-68. Shlomo Benartzi and Richard H. Thaler "How Much Is Investor Autonomy Worth?" Journal of Finance, 2002, 57(4), pp. 1593-616. Camerer, Colin F., George Loewenstein and Drazen Prelec. Mar. 2005. "Neuroeconomics: How neuroscience can inform economics." Journal of Economic Literature. Vol. 34, No. 1. Colin Camerer, Samuel Issacharoff, George Loewenstein, Ted O'Donoghue, and Matthew Rabin. Jan 2003. "Regulation for Conservatives: Behavioral Economics and the Case for 'Assymetric Paternalism.'" University of Pennsylvania Law Review. 151, 1211- 1254. *James Choi, David Laibson, and Brigitte Madrian. $100 Bills on the Sidewalk: Suboptimal Saving in 401(k) Plans July 16, 2005. *James Choi, Brigitte Madrian, David Laibson, and Andrew Metrick. Optimal Defaults and Active Decisions December 3, 2004. James Choi, David Laibson, and Brigitte C. Madrian “Are Education and Empowerment Enough? Under-Diversification in 401(k) Plans” forthcoming, Brookings Papers on Economic Activity. *James Choi, David Laibson, Brigitte Madrian, and Andrew Metrick “Optimal Defaults” American Economic Review Papers and Proceedings, May 2003, pp. 180-185. Dominique J.-F. de Quervain, Urs Fischbacher, Valerie Treyer, Melanie Schellhammer, Ulrich Schnyder, Alfred Buck, Ernst Fehr. The Neural Basis of Altruistic Punishment Science 305, 27 August 2004, 1254-1258 Shane Frederick, George Loewenstein, and O'Donoghue, T. -
Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts: Dataset.” American Economic Review
American Economic Review 2019, 109(4): 1530–1567 https://doi.org/10.1257/aer.20171455 Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts† By Amy Finkelstein, Nathaniel Hendren, and Mark Shepard* How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts’ subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to esti- mate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, drop- ping about 25 percent for each $40 increase in monthly enrollee pre- miums. Marginal enrollees tend to be lower-cost , indicating adverse selection into insurance. But across the entire distribution we can observe approximately the bottom 70 percent of the willingness to pay distribution( enrollees’ willingness to pay is always less than half of their own) expected costs that they impose on the insurer. As a result, we estimate that take-up will be highly incomplete even with generous subsidies. If enrollee premiums were 25 percent of insur- ers’ average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10 percent of average costs would still leave at least 20 percent uninsured. We briefly consider potential explanations for these findings and their normative impli- cations. JEL G22, H51, H75, I13, I18 ( ) Governments spend an enormous amount of money on health insurance for low-income -
Still Preliminary and Incomplete
EQUALIZING SUPERSTARS: THE INTERNET AND THE DEMOCRATIZATION OF EDUCATION DARON ACEMOGLU, DAVID LAIBSON, AND JOHN A. LIST Abstract. Educational resources distributed via the Internet are rapidly proliferating. One prominent concern associated with these potentially transformative developments is that, as many of the leading technologies of the last several decades have been, these new sweeping technological changes will be highly disequalizing, creating superstar teachers, a wider gulf between different groups of students and potentially a winner-take-all educational system. In this paper, we argue that, these important concerns notwithstanding, a major impact of the superstars created by web-based educational technologies will be the democ- ratization of education: not only will educational resources be more equally distributed, but also lower-skilled teachers will be winners from this technology. At the root of our results is the observation that for web-based technologies to exploit the comparative advantage of skilled lecturers, they will need to be complemented with opportunities for face-to-face discussions with instructors, and web-based lectures will increase the quantity and quality of teaching services complementary to such instruction, potentially increasing the marginal product and wages of lower-skill teachers. Still Preliminary and Incomplete. 1. Introduction Educational resources distributed via the Internet are rapidly proliferating. These new re- sources include lecture videos, on-line teaching notes, Internet chat groups, on-line interactive problem sets with instantaneous feedback/grading, educational games, and many other de- veloping technologies. Numerous institutions have created fully autonomous software that grades student essays.1 In the popular press, MOOC’s(massive open on-line courses) have received the most fanfare, though the social value of these courses is as yet unproven and the high drop-out rates (in excess of 90%) have been fodder for much debate (see Ahmad et Date: December 26, 2013. -
Loss Aversion, Moral Hazard, and Stochastic Contracts
Loss Aversion, Moral Hazard, and Stochastic Contracts By Hoa Ho∗ Draft: June 6, 2021 I examine whether stochastic contracts benefit the principal in the setting of moral hazard and loss aversion. Incorporating that the agent is expectation-based loss averse and allowing the principal to add noise to performance signals, I find that stochastic contracts reduce the principal's implementation cost in comparison to de- terministic contracts. The optimal stochastic contract pays a high wage whenever good signals are realized and with a positive prob- ability when bad signals are realized. Surprisingly, if performance signals are highly informative about the agent's action, stochastic contracts strictly dominate the optimal deterministic contract for almost any degree of loss aversion. The findings have an impor- tant implication for designing contracts for loss-averse agents: the principal should insure the agent against wage uncertainty by em- ploying stochastic contracts that increase the probability of a high wage. JEL: D82, D86, M12, M52 Keywords: loss aversion, moral hazard, stochastic contracts, reference-dependent preferences The interplay between risk aversion and incentives is central to the moral haz- ard literature, especially in designing an optimal contract. In this literature, one of the very few general results, as Bolton and Dewatripont (2005) argue, is the informativeness principle. This theory, going back to Holmstrom et al. (1979), Holmstrom (1982), and Grossman and Hart (1983), states that a wage contract ∗ LMU Munich, Department -
Neuroeconomics
Handbook of Experimental Economics Editors: John Kagel and Alvin Roth Neuroeconomics Colin Camerer1 (California Institute of Technology), Jonathan Cohen2 (Princeton University), Ernst Fehr3 (University of Zurich), Paul Glimcher4 (New York University), David Laibson5 (Harvard University) 1Division HSS, Caltech, [email protected]; 2Princeton Neuroscience Institute, Princeton University, [email protected]; 3University of Zurich, Department of Economics, [email protected]; 4Center for Neural Science, New York University, [email protected]; 5Department of Economics, Harvard University, [email protected]. We gratefully acknowledge research assistance from Colin Gray and Gwen Reynolds and key guidance from John Kagel, Alvin Roth, and an anonymous referee. We also acknowledge financial support from the Moore Foundation (Camerer), the National Science Foundation (Camerer), and the National Institute of Aging (Cohen; Glimcher, R01AG033406; Laibson, P01AG005842), the Swiss National Science Foundation (Fehr, CRSII3_141965/1) and the European Research Council (Fehr, 295642). Hyperlink Page Introduction Chapter 1: Neurobiological Foundations Chapter 2: Functional MRI Chapter 3: Risky Choice Chapter 4: Intertemporal choice and self-regulation Chapter 5: The neural circuitry of social preferences Chapter 6: Strategic thinking References Introduction “One may wonder whether Adam Smith, were he working today, would not be a neuroeconomi[st]” Aldo Rustichini (2005). Neuroeconomics is the study of the biological microfoundations of economic -
Neuroeconomics and Aging
Neuroeconomics and Aging Palo Alto, California March 31–April 1, 2006 WORKSHOP SUMMARY National Institute on Aging Behavioral and Social Research Program For Administrative Use Prepared by: Rose Li and Associates, Inc. July 2006 NIA Workshop on Neuroeconomics and Aging Page 1 National Institute on Aging Workshop on Neuroeconomics and Aging March 31–April 1, 2006 Executive Summary There has been a noticeable trend in the growing number and complexity of economically relevant decisions being faced by middle-aged and older adults, especially regarding pension and benefit issues, portfolio investment choices, health management, pharmaceuticals, and health insurance options. These can be cognitively challenging decisions, and the dizzying array of options faced by the decision maker can – at any age – adversely affect people’s abilities to absorb, process, and weigh information. Meanwhile, the choices people make with regard to savings, investment, and health care can have a profound impact on their well being in later life. This trend, therefore, motivates the need for a greater understanding of how cognitive, motivational, and emotional processes in decision making influence economic behavior at different life stages, and particularly in middle to late adulthood when many of these decisions are made. Our current understanding of how changes in emotional, cognitive, and physical capacities at different life stages, in combination with life course changes in motivation and goals, impact economic behaviors at different life stages remains limited. Even less is known about changes in the neurobiological underpinnings of these interactions. Recent efforts in neuroeconomics, that apply the theories and methodologies of behavioral economics, game theory, psychology, and cognitive, social and affective neuroscience to the study of economic behaviors, are beginning to shed light on the neurobiological basis of these kinds of complex decision making processes.