New York University - Department of Economics - Leonard N. Stern School of Business
California Institute of Technology - Division of the Humanities and Social Sciences
May 7, 2012
Behavioral economics presents a "paternalistic" rationale for intervention by a benevolent government. This paper studies the desirability of various forms of collective action when government decisions are determined via the political process in response to votes by time inconsistent voters. We consider an economy where the only "distortion" is the agents' time inconsistency. We first examine a fully decentralized economy where agents can make private "investments" in a commitment technology. We show that the demand for commitment is non monotone with the degree of time inconsistency, with agents with intermediate intensity of present bias exhibiting the highest value of commitment. We then study several forms of collective action. If only commitment decisions are centralized, commitment investment is often more moderate than if all decisions are centralized. Welfare consequences of full centralization (of both commitment and consumption decisions) are ambiguous and depend on the distribution of time inconstistency in the population.
Number of Pages in PDF File: 36
Keywords: Time Inconsistency, Political Economy, Nudge Policies
JEL Classification: D02, D03, D72, H4working papers series
Date posted: July 31, 2012
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