Working Paper: NBER ID: w23620
Authors: Itzik Fadlon; David Laibson
Abstract: Resource allocations are jointly determined by the actions of social planners and households. We study economies in which households have private information about their tastes and have a distribution of behavioral propensities: optimal, myopic, or passive. In such economies, we show that utilitarian planners enact policies such as Social Security and default savings that cause equilibrium consumption smoothing (on average in the cross-section of households). Our framework resolves tensions in the household savings literature by simultaneously explaining evidence of consumption smoothing and optimal savings on average across households while also predicting behavioral anomalies at the household level. In general, common tests of consumption smoothing are not sufficient to show that households are optimizers, but natural experiments can be used to identify the fractions of optimizing, myopic, and passive households.
Keywords: paternalism; retirement savings; behavioral economics; consumption smoothing
JEL Codes: D61; E70; H00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of myopic and passive households (D19) | overall consumption dynamics (E20) |
| myopic and passive households (G59) | impact on optimizers due to binding constraints (C61) |
| planner's rationality and utilitarian preferences (D01) | consumption smoothing (D15) |
| planner's actions (e.g., setting default savings rates) (D14) | consumption smoothing (D15) |