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Flashcards in Behavioural Deck (20)
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1
Q

How analyse welfare if agents not rational and selfish?

A
  • positive models of behaviour (e.g. hyperbolic discounting)

- develop bounds on welfare (based on observed choices)

2
Q

Key deviations from homo economicus?

A
  • social preferences
  • bounded rationality
  • bounded willpower/impatience/procrastination
  • reference-dependent preferences
3
Q

Type of discounting if individuals ARE time consistent?

A

Exponential

4
Q

Type of discounting if individuals are NOT time consistent?

A

Hyperbolic

5
Q

Discount factor between current period and future period w/hyperbolic discounting?

A

Beta * Delta (to the power of whatever time period it is)

6
Q

Discount factor between 2 future periods w/hyperbolic discounting?

A

Delta

7
Q

Theories about which discount factor to use in welfare calculations?

A
  • Long-run preferences (Beta = 1 and Delta < 1, i.e. exponential, not hyperbolic, discounting)
  • Short-run actual preferences (even if that means hyperbolic discounting)
  • Multiple selves (implication - focus on long-run self)
8
Q

Explain the idea of multiple selves (in terms of discount factor to use for welfare calculations)

A
  • long-run self (the ‘planner’) w/discount factor delta
  • series of short-run selves (‘doers’) that live for 1 period and are totally myopic (discount factor gamma = 0)
  • long-run self sets incentives for short-run selves
  • short-run selves choose action, given incentives
  • short-run selves are the only selves that derive utility
  • utility of long-run self = discounted sum of utilities of all short-run selves

WELFARE IMPLICATION - FOCUS ON LONG-RUN SELF

9
Q
  1. What is an ancillary condition in Bernheim and Rangel’s (2009) bounds model?
  2. Example?
A
  1. Affects choice behaviour, but not experienced utility

2. e.g framing, salience

10
Q

Broad types of possible intervention if people suffer from behavioural biases?

A
  1. paternalism (direct regulation)

2. behaviouralism (nudges)

11
Q

….. and ….. (….) created a model to derive bounds on welfare using revealed preferences

A

Bernheim and Rangel (2009) created a model to derive bounds on welfare using revealed preferences

12
Q
  1. Problem of ‘looseness of bounds’ on welfare
  2. Solution?
  3. Evaluate solution
A
  1. Problem - if behavioural issues important (e.g. framing, salience), then bounds so ‘loose’/wide that they become uninformative

2a. Solution - discard certain d’s as being ‘contaminated’ for welfare analysis
2b. e.g. intoxication reduces rationality so discard choices made when drunk
2c. Fewer d’s means tighter bounds on welfare

  1. Problem – refinements require positive theory of behaviour…(original problem!)
13
Q

Outline Bernheim and Rangel’s (2009) model for deriving bounds on welfare

A
  1. Standard models: agents choose x (from choice set X)
  2. Behavioural models: agents choose (from generalised choice set G, where G = (x,d))

3a. ‘d’ = ancillary condition (affects choice behaviour, but not experienced utility)
3b. d could be framing, salience, default option

  1. Revealed preference: prefer x over y, if x always chosen over y FOR ANY D
14
Q

Provide simple example of deriving bounds on welfare using revealed preferences

A
  1. Example – car insurance (3 different plans: 1, 2 and 3)
  2. Run 2 experiments (experiment A and B could represent different framings of survey, or different salience of options)

3a. Preferences in experiment A: 1 > 2 > 3
3b. Preferences in experiment B: 2 > 1 > 3

  1. Plan 3 never optimal for all d (whatever the ancillary condition is, e.g. framing), regardless of positive theory, so optimum bounded between 1 and 2
15
Q

Chetty et al (2009)

A

AFFECT OF TAX SALIENCE

  1. Experiment:

(i) Vary salience of sales tax
(ii) Including sales tax of 7.35% in displayed price decreases demand by ~8%

  1. Empirical analysis:

(i) Exploit state-level changes in excise/sales taxes
(ii) US consumers more responsive to increase in excise duty on alcohol (included in displayed price) than sales tax (not included in displayed price)

16
Q

Chetty et al (2009)

  1. Experiment:

(i) Vary salience of sales tax
(ii) Including sales tax of …..% in displayed price decreases demand by …..%

  1. Empirical analysis:

(i) Exploit state-level changes in excise/sales taxes
(ii) US consumers more responsive to increase in ….. (included in displayed price) than ….. (not included in displayed price)

A

Chetty et al (2009)

  1. Experiment:

(i) Vary salience of sales tax
(ii) Including sales tax of 7.35% in displayed price decreases demand by ~8%

  1. Empirical analysis:

(i) Exploit state-level changes in excise/sales taxes
(ii) US consumers more responsive to increase in excise duty on alcohol (included in displayed price) than sales tax (not included in displayed price)

17
Q

Experimental evidence that consumers are more responsive to changes in more salient taxes

A

Chetty et al (2009)

Experiment:

(i) Vary salience of sales tax
(ii) Including sales tax of 7.35% in displayed price decreases demand by ~8%

18
Q

Welfare analysis with salience effects - preference recovery assumptions

A

(1) taxes affect utility only through effects on chosen consumption bundle
(2) when tax inclusive prices fully salient, agent chooses same allocation as fully-optimising agent

19
Q
  1. If tax salience affects behaviour, how might a less salient tax be more efficient?
  2. Under what assumption?
A
  1. Less salient tax affects behaviour less, leading to smaller fall in consumption and lower DWL
  2. Assumption = no income effects (dx/dz = 0)
20
Q
  1. Under what assumption might a less salient tax decrease efficiency (if salience affects behaviour)?
  2. Example?
A
  1. Assumption = income effects (dx/dz > 0)

2. Agent who ignores complex tax on cars might under-consume food due to income effect (lowering welfare)