Working Paper: CEPR ID: DP10458
Authors: Alessandro Lizzeri; Leeat Yariv
Abstract: Behavioral economics presents a "paternalistic" rationale for a benevolent government's intervention. We consider an economy where the only ?distortion? is agents? time inconsistency. We study the desirability of various forms of collective action, ones pertaining to costly commitment and ones pertaining to the timing of consumption, when government decisions respond to voters? preferences via the political process. If only commitment decisions are centralized, commitment investment is more moderate than if all decisions are centralized. Commitment investment is minimal when only consumption is centralized. First-period welfare is highest under either full centralization or laissez faire, depending on the populations? time-inconsistency distribution.
Keywords: Behavioral Economics; Political Economy; Hyperbolic Discounting; Time Inconsistency
JEL Codes: D04; D70; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decentralized decision-making (D70) | lower overall commitment investments (G11) |
| Centralized decision-making (D70) | higher investment in commitment (E22) |
| Higher investment in commitment (E22) | improved overall welfare (I30) |
| Distribution of present bias among voters (D72) | understanding of causal effects of government intervention (E65) |
| Political processes (D72) | economic outcomes (F61) |