Working Paper: NBER ID: w13737
Authors: B. Douglas Bernheim; Antonio Rangel
Abstract: We propose a broad generalization of standard choice-theoretic welfare economics that encompasses a wide variety of non-standard behavioral models. Our approach exploits the coherent aspects of choice which 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) if 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.
Keywords: Behavioral Economics; Welfare Economics; Choice Theory
JEL Codes: D01; D60; H40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| choice patterns (D10) | welfare outcomes (I38) |
| behavioral theories (C92) | welfare criteria (I30) |
| generalized choice situations (GCS) (C70) | individual welfare (I30) |
| behavioral anomalies (D91) | standard welfare analysis (D69) |
| generalized welfare criterion (D69) | normative judgments (D63) |
| theoretical model (C20) | practical welfare analysis (D69) |
| generalized compensating variation (D11) | consumer surplus (D46) |