Behavioral economics presents a "paternalistic" rationale for government intervention. As does traditional public economics, existing behavioral economics literature assumes a benevolent government. The point of departure for the proposed research is rather to argue that, just as for textbook public policy analysis, it is useful to consider what happens when, instead of a benevolent planner, the political process determines the design of policy. Will politicians seeking election exploit/indulge the voters' behavioral distortions away from rationality? Are such behavioral distortions amenable to aggregation into collective action? What are the implications for the constitutional scope of government activity?

This proposal mostly considers the widely studied case of time inconsistency. Existing literature has presented theories where consumers/agents are subject to problems of self-control, and has shown that such problems can lead to procrastination (doing things too late), preproperation (doing things too early) (O'Donoghue-Rabin 1999), insufficient savings for retirement (Laibson et al. 1998), harmful obesity and addictions (Gul-Pesendorfer 2007, O'Donoghue-Rabin 2000) and other phenomena.

These self-control problems also identify a demand for commitment (rehab clinics, illiquid assets with costly withdrawal, etc.) that cannot arise in the context of standard economic models. The proposal asks: How does government policy respond to voters' time inconsistency? How does government intervention affect and respond to the demand for commitment? As a starting point the proposal assumes the simplest and most standard political structure: competition among two office-seeking candidates.

The first part of the proposal suggests that the presence of time inconsistent voters may lead to fiscal irresponsibility and large public debt, highlighting a novel reason for constitutional restrictions on government debt. The second part of the proposal is more abstract and considers a taxonomy of interactions between the public and the private sector to understand how the political system responds to a demand for individual commitments. This seems fruitful because it is necessary to distinguish between public commitments, such as pension systems (and lock-in of 401(k) accounts) or laws prohibiting consumption of substances that may lead to failures of self-control, from private commitments.

The project so far suggests that the political process does not seem to respond effectively to the demand for commitment and that centralized decision making may undermine an individual's willingness to supply such commitment privately. The project also suggests other possible avenues for exploration of the interaction between the political process and voters' imperfect rationality.

By its nature, this research is interdisciplinary since it uses tools from economics and political science to study a political process populated by voters who suffer from biases whose study is typically the domain of psychology. One broader impact of the research is to achieve a better understanding of how the degree of voter rationality, self-control, and sophistication affects the proper boundaries for government activity.

National Science Foundation (NSF)
Division of Social and Economic Sciences (SES)
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Georgia Kosmopoulou
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New York University
New York
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