A Reduced-Form Approach to Behavioral Public Finance

Abstract

Research in behavioral public finance has blossomed in recent years, producing diverse empirical and theoretical insights. This article develops a single framework with which to understand these advances. Rather than drawing out the consequences of specific psychological assumptions, the framework takes a reducedform approach to behavioral modeling. It emphasizes the difference between decision and experienced utility that underlies most behavioral models. We use this framework to examine the behavioral implications for canonical public finance problems involving the provision of social insurance, commodity taxation, and correcting externalities. We show how deeper principles undergird much work in this area and that many insights are not specific to a single psychological assumption.

Regulating Internalities

“…Chetty (2015), Mullainathan, Schwartzstein, and Congdon (2012), and . It is thus useful to think of internalities as "externalities that individuals impose on themselves.…”

“…Relative to the uniform subsidy, the first best would generate additional welfare gains of fgl for the biased consumers and eliminate the welfare loss of afk for the unbiased consumers. In theory, this could be approximated through behavioral "tagging," which Allcott, Knittel, and Taubinsky (2015) and Mullainathan, Schwartzstein, and Congdon (2012) discuss as an extension to Akerlof's (1978) analysis of targeted social programs. For example, larger subsidies could be made available to consumers with characteristics associated with larger bias, or energy efficiency programs could be preferentially marketed to such consumers.…”

“…We follow DellaVigna (2009) and Mullainathan, Schwartzstein, and Congdon (2012) (2006), Sallee, West, and Fan (2015), and others use this idea to measure whether consumers fully value particular potentially-shrouded costs. The weakness of this approach is that it is often not possible to find econometrically exogenous variation in prices and the potentially-shrouded cost.…”

Behavioral Welfare Economics and FDA Tobacco Regulations

“…The following section uses a simple two-period model to develop expressions for the impact of tobacco control policies on social welfare. Our model is an example of the reduced-form approach to behavioral welfare economics (Mullainathan et al 2012, Chetty 2015. Our model includes: nudge and paternalistic regulations; an excise tax on cigarettes; internalities created by period 1 versus period 2 consumption; and externalities from cigarette consumption.…”

Behavioral political economy: A survey

“…: 361, 364-365) and would then be closely related to "Behavioral Public Finance" (e.g. Mullainathan et al 2012). "Behavioral politics", suggested by Brennan (2008) seems to connote a normative bias.…”