Behavioral Welfare Economics and Risk Preferences: A Bayesian Approach

47 Pages Posted: 17 Aug 2020

See all articles by Sherry Gao

Sherry Gao

University of Massachusetts Amherst

Glenn W. Harrison

Georgia State University - J. Mack Robinson College of Business

Rusty Tchernis

Georgia State University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

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Abstract

We propose the use of Bayesian estimation of risk preferences of individuals for applications of behavioral welfare economics to evaluate observed choices that involve risk. Bayesian estimation provides more systematic control of the use of informative priors over inferences about risk preferences for each individual in a sample. We demonstrate that these methods make a difference to the rigorous normative evaluation of decisions in a case study of insurance purchases. We also show that hierarchical Bayesian methods can be used to infer welfare reliably and efficiently even with significantly reduced demands on the number of choices that each subject has to make. Finally, we illustrate the natural use of Bayesian methods in the adaptive evaluation of welfare.

Keywords: behavioral welfare economics, Bayesian Analysis, risk preferences, insurance

JEL Classification: D6, C11, D81, G40

Suggested Citation

Gao, Sherry and Harrison, Glenn William and Tchernis, Rusty, Behavioral Welfare Economics and Risk Preferences: A Bayesian Approach. IZA Discussion Paper No. 13580, Available at SSRN: https://ssrn.com/abstract=3674301

Sherry Gao (Contact Author)

University of Massachusetts Amherst

Glenn William Harrison

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
407-489-3088 (Phone)
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HOME PAGE: http://www.cear.gsu.edu/

Rusty Tchernis

Georgia State University - Department of Economics ( email )

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Atlanta, GA 30302-3992
United States

HOME PAGE: http://www2.gsu.edu/~ecort

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics ( email )

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