Libertarian Paternalism, Information Sharing, and Financial Decision-Making

Abstract

We develop a theoretical model to study the welfare effects of libertarian paternalism on information acquisition, social learning, and financial decision-making. Individuals in our model are permitted to appreciate and use the information content in the default options set by a social planner. We show that in some circumstances the presence of default options can decrease welfare by slowing information propagation in the economy. An extension of the model shows that partial information disclosures by the social planner can increase individuals' incentives for gathering and sharing information, but that this does not affect the set of circumstances in which the absence of default options is optimal. Our analysis also considers a setting in which individuals can sell their information to others. We show that default options cause the quality (and price) of advice to decrease, which may lower social welfare. Finally, we study the effects of procrastination and excessive trust in the social planner on our analysis.

Keywords: Libertarian Paternalism, Default Options, Household Finance, Social Learning, Communication

JEL Classification: D11, D14, D62, D83, G28, G23, H10