Cognitive Ability and Paternalism

32 Pages Posted: 20 Dec 2002

See all articles by Gilles Saint-Paul

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2002

Abstract

This Paper analyses the welfare effects of price restrictions on private contracting in a world where agents have a limited cognitive ability. People compute the costs and benefits of entering a transaction with an error. The government knows the distribution of true costs and benefits as well as that of errors. By imposing constraints on transaction prices, the government eliminates some that are on average inefficient - because the price signals that one of the parties has typically grossly overestimated its benefit from participation. This policy may increase aggregate welfare even though some of the transactions being blocked are actually efficient. The Paper also studies the extent to which the use of private consultants with sufficient intelligence by people with limited intelligence may dominate government regulation.

Keywords: Cognitive ability, minimum wages, regulation, price control, paternalism, intelligence

JEL Classification: D81, D82, D83, H21, I30, J38, J41, J42

Suggested Citation

Saint-Paul, Gilles, Cognitive Ability and Paternalism (November 2002). CEPR Discussion Paper No. 3642. Available at SSRN: https://ssrn.com/abstract=363280

Gilles Saint-Paul (Contact Author)

University of Toulouse I - GREMAQ-IDEI ( email )

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Centre for Economic Policy Research (CEPR)

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CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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