Working Paper: NBER ID: w11789
Authors: Edward L. Glaeser
Abstract: Does bounded rationality make paternalism more attractive? This Essay argues that errors will be larger when suppliers have stronger incentives or lower costs of persuasion and when consumers have weaker incentives to learn the truth. These comparative statics suggest that bounded rationality will often increase the costs of government decisionmaking relative to private decisionmaking, because consumers have better incentives to overcome errors than government decisionmakers, consumers have stronger incentives to choose well when they are purchasing than when they are voting and it is more costly to change the beliefs of millions of consumers than a handful of bureaucrats. As such, recognizing the limits of human cognition may strengthen the case for limited government.
Keywords: bounded rationality; paternalism; government decision-making
JEL Codes: H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bounded rationality (D01) | attractiveness of paternalism (D64) |
| cost dynamics (D24) | quality of decision-making (D91) |
| incentive structure (M52) | accuracy of decision-making (D91) |