Paternalism and Pseudo-Rationality: An Illustration Based on Retirement Savings

Abstract

Resource allocations are jointly determined by the actions of social planners and households. We study economies in which households have private information about their tastes and have a distribution of behavioral propensities: optimal, myopic, or passive. In such economies, we show that utilitarian planners enact policies such as Social Security and default savings that cause equilibrium consumption smoothing (on average in the cross-section of households). Our framework resolves tensions in the household savings literature by simultaneously explaining evidence of consumption smoothing and optimal savings on average across households while also predicting behavioral anomalies at the household level. In general, common tests of consumption smoothing are not sufficient to show that households are optimizers, but natural experiments can be used to identify the fractions of optimizing, myopic, and passive households.