nudge Flashcards
whats the difference between neoclassical economics and behavioural economics
Neoclassical economics
- Assumption of rational choice
- Governments should take a hands-off (or libertarian) attitude towards private choice
Behavioral economics
- emphasis on predictable irrationalities,
- Government intervention (or paternalism) seem less unreasonable
whats a nudge
any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives..
describe the behavioural model by Chetty et al. 2015
- U(c); agent’s experienced utility – actual well-being
- Planner wants to max U(c)
- By choosing a set of tax rates (t) and nudges (n)
- V(c); agent’s decision utility
- Agent wants to max V(c) when choosing c
Utility function is influenced by two groups of conditions
-n; can be manipulated by policy makers
Eg. framing, default
-d; cannot be manipulated by policy makers
Eg. overconfidence or perception
-Z; wealth
-Revenue requirement 𝑅̅
what happens if n relaxes
yields new policy tools
can make some choices more noticeable
what happens if d relaxes
Yields better predictions about the effects of existing policies
can make better predictions about the effect of taxes
what happens if you relax n, d and u=v
Yields new welfare implications and better predictions about the effects of existing policies
Policy question: should we encourage low-income families to move to lower-poverty areas?
Behavioral models: moving families to lower-poverty areas improves their welfare Use subsidies (housing vouchers) or nudges (counseling) to encourage such moves
Neoclassical model: do not intervene unless there are externalities
May include intergenerational externalities if parents underinvest in children
what model should we use when we are uncertain about the true model
