Unintended Consequences: Ambiguous Welfare Effects when the Policymaker is Unaware

Abstract

Unintended consequences manifest themselves in many aspects of socioeconomic life. We develop a model of unintended consequences (UC) of novel policies. In our setup, the policymaker is unaware of the UC of her policy. We discuss several approaches to evaluating policy in terms of welfare measures, and elucidate the impact of a policymaker who dislikes unintended consequences, that is, who is UC-averse. In order to underscore policy diversification, we also present a mean-variance framework. We show theoretically and in a calibration to the Great Inflation, that a policymaker who is unaware of unintended consequences can generate both positive and negative welfare effects.

Keywords: Unintended Consequences, UC-Aversion, Unawareness, Policy Effectiveness, Policy Portfolio, Great Inflation

JEL Classification: D78, D8, D81, D83, E44, E61