Money, Is That What I Want?: Competition Policy & the Role of Behavioral Economics

Abstract

Although the behavioral economics and happiness economic literature are hot areas in legal and economic scholarship, the U.S. policymakers, until recently, have not embraced the literature. That is changing with the financial crisis. Policymakers are re-examining the assumptions underlying many neoclassical economic theories embedded in their policies.

This article addresses one cornerstone of neoclassical economic theory, namely that rational consumers pursue their economic self-interests. It is commonly associated with Adam Smith’s famous statement: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” This assumption of self-interest has had profound policy implications as it pervades many areas of the law.

The article first outlines how this assumption of self-interest has shaped U.S. competition policy over the past thirty years. It next surveys the behavioral experiments, which show that many individuals do not solely pursue their self-interest. Indeed, appealing to self-interest, as several of these experiments demonstrate, may lead to suboptimal outcomes. The assumption also disregards the important effect of social, ethical, and moral norms on human behavior. Because the assumption of self-interest is not descriptive, the article next addresses whether governmental policies should advocate the pursuit of self-interest. Using the recent findings from the happiness economic literature, the article shows why appealing to self-interest may make citizens more, not less, miserable. It then discusses the risks if governmental policies prime individuals to pursue their self-interest. The article has broad implications for U.S. economic and legal policies, as the assumption of self-interest implicates, among other things, environmental concerns, consumerism, the problems Americans face in a debt economy, and privacy concerns.

Keywords: antitrust, competition policy, happiness, behavioral economics

JEL Classification: K21, L4, H3