Working Paper: NBER ID: w24828
Authors: B. Douglas Bernheim; Dmitry Taubinsky
Abstract: This chapter surveys work in behavioral public economics, emphasizing the normative implications of non-standard decision making for the design of welfare-improving and/or optimal policies. We highlight combinations of theoretical and empirical approaches that together can produce robust qualitative and quantitative prescriptions for optimal policy under a range of assumptions concerning consumer behavior. The chapter proceeds in four parts. First, we discuss the foundations and methods of behavioral welfare economics, focusing on choice-oriented approaches and the measurement of self-reported well-being. Second, we examine commodity taxes and related policies: we summarize research on optimal corrective taxes, the efficiency costs of sales taxes that are not fully salient, the distributional effects of sin taxes, the use of non-price policies such as nudges, the tax treatment of giving, and luxury taxes. Third, we examine policies affecting saving, including capital income taxation, commitment opportunities, default contribution provisions for pension plans, financial education, and mandatory saving programs. Fourth, we detail the manner in which under-provision of labor supply and misunderstandings of policy instruments impact optimal labor income taxation and social insurance. We close with some recommendations for future work in behavioral public economics.
Keywords: Behavioral Economics; Public Economics; Welfare Economics
JEL Codes: H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonstandard decision-making processes (D91) | suboptimal consumer choices (D11) |
| suboptimal consumer choices (D11) | welfare outcomes (I38) |
| corrective taxes (H23) | social welfare (I38) |
| corrective taxes (H23) | consumer behavior (D19) |
| design of pension plans and savings programs (H55) | individual savings behavior (D14) |
| design of pension plans and savings programs (H55) | overall economic welfare (D69) |
| nudges and defaults (D91) | savings rates (D14) |
| misperceptions of labor supply policies (J48) | inefficiencies in labor income taxation (H31) |
| misperceptions of labor supply policies (J48) | social insurance (H55) |