By William J. Congdon, Jeffrey R. Kling, Sendhil Mullainathan
Conventional public finance presents a robust framework for coverage research, however it depends upon a version of human habit that the hot technology of behavioral economics more and more calls into query. In Policy and Choice economists William Congdon, Jeffrey Kling, and Sendhil Mullainathan argue that public finance not just can include many classes of behavioral economics but additionally can function a superb beginning from which to use insights from psychology to questions of financial policy.
The authors revisit the center questions of public finance, armed with a richer point of view on human habit. they don't in basic terms observe findings from psychology to express monetary difficulties; as a substitute, they discover how mental components really reshape middle techniques in public finance resembling ethical danger, deadweight loss, and incentives.
half one units the degree for integrating behavioral economics into public finance by way of studying the facts from psychology and constructing a framework for utilising it to questions in public finance. partially , the authors follow that framework to precise issues in public finance, together with social assurance, externalities and public items, source of revenue aid and redistribution, and taxation.
In doing so, the authors construct a unified analytical method that encompasses either conventional coverage levers, resembling taxes and subsidies, and extra psychologically proficient tools. the internet results of this cutting edge procedure is a completely behavioral public finance, an integration of psychology and the economics of the general public region that's specific, systematic, rigorous, and reasonable.
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Extra resources for Policy and Choice: Public Finance Through the Lens of Behavioral Economics
However, psychology and behavioral economics have amassed a growing collection of findings suggesting that according to those criteria, individuals are, in practice, flawed decisionmakers. Consider one well-known case relating to choice behavior in the face of an increase in the number of alternatives. Standard assumptions of optimization imply that increasing the number of elements in a choice set should leave individuals at least as likely to choose from the set of increased choices as to choose from the original set.
For the purpose of working through their implications for public finance, we will group the deviations into three categories according to the general feature of decisionmaking that drives the deviation: limited attention, limited computational capacity, and biased reasoning. Limited attention captures deviations from optimality that appear to be due to the fact that there are limits to the bandwidth of the human brain in processing stimuli—that individuals cannot notice and attend to all of the features of choice simultaneously.
They are, broadly speaking, manifestations of imperfect optimization. Finally, it is worth noting before moving on that none of these limitations— limited attention, limited computational capacity, or biased reasoning—is tantamount to limited intelligence. They reflect decisionmaking as practiced, not capability. Moreover, they appear to be nearly universal features of decisionmaking. 48 So these limitations are not related to intelligence, or even expertise. They simply appear to be properties of the way that the human brain forms judgments and makes decisions most of the time.
Policy and Choice: Public Finance Through the Lens of Behavioral Economics by William J. Congdon, Jeffrey R. Kling, Sendhil Mullainathan