Paternalism and Psychology

The University of Chicago Law Review, Dec 2006

Does bounded rationality make paternalism more attractive? This Essay argues that errors will be larger when suppliers have stronger incentives or lower costs of persuasion and when consumers have weaker incentives to learn the truth. These comparative statics suggest that bounded rationality will often increase the costs of government decisionmaking relative to private decision-making, because consumers have better incentives to overcome errors than government decision-makers, consumers have stronger incentives to choose well when they are purchasing than when they are voting, and it is more costly to change the beliefs of millions of consumers than a handful of bureaucrats. As such, recognizing the limits of human cognition may strengthen the case for limited government.

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Paternalism and Psychology

Paternalism and Psychology Edward L. Glaesert Does bounded rationalitymake paternalismmore attractive? This Essay argues that errors will be larger when suppliers have stronger incentives or lower costs of persuasionand when consumers have weaker incentives to learn the truth. These comparative statics suggest that bounded rationalitywill often increasethe costs of government decisionmaking relativeto privatedecisionmaking, because consumers have better incentives to overcome errors than government decisionmakers, consumers have stronger incentives to choose well when they are purchasingthan when they are voting, and it is more costly to change the beliefs of millions of consumers than a handful of bureaucrats.As such, recognizing the limits of human cognition may strengthen the case for limited government. - ing. The debate over paternalism must weigh private and public errors. If errors are thought to be exogenous then there is little reason to believe that these errors will be greater among public or private decisionmakers, but if psychological errors are understood to be endogenous, then there are good reasons why we might think that public decisionmaking is likely to be more flawed than private decisionmaking. In Part I, I review the evidence supporting the view that psychological errors are endogenous market phenomena that respond to both "demand" and "supply." On the supply side, purveyors of influence have the capacity to change popular opinion. On the demand side, human beings have some capacity to limit errors, especially with the time and incentives to acquire advice and information. In Part II, I present three simple models that show how endogenous cognitive errors increase the advantage of private decisionmaking over public decisionmaking, which suggests that recognizing the limits of human cognition pushes us away, not towards, paternalism. In these models, as the bounds to human rationality increase, the quality of government decisionmaking decreases even faster than the quality of private decisionmaking. The first model hinges on the fact that consumers face stronger incentives to get things right than government decisionmakers do when making decisions about private individuals. In the second model, the supply of error comes from a private firm that is trying to increase demand. If the cost of persuading one government bureaucrat is less than the cost of persuading millions of consumers, then government bureaucrats will be more prone to error than private consumers. The final model looks at the electoral process and relies on the fact that individuals have stronger incentives when making consumption decisions than when taking part in an election to choose a leader who will make consumption decisions for them. In this model, there is an advantage from public decisionmaking. When information is not highly correlated, and a majority is better informed than a minority, then the tyranny of the majority can have benefits (these would disappear with enough consumer heterogeneity). However, as people become more and more prone to error, the tyranny of the majority induces everyone to make the wrong decision. These examples are far from definitive. In some cases the governments may make better decisions. Still, once errors are seen to be endogenous, the lack of incentives in politics and among politicians and the small numbers of public decisionmakers suggest that government decisionmaking is likely to be particularly erroneous. Although there are surely some empirical cases of paternalism that have been successful, across a wide range of settings, the models' basic implication of faulty government decisionmaking cannot be rejected. Over and over again, paternalism has been abused by governments responding to special interests or seeking to aggrandize their own authority. In Part III, I turn to soft paternalism. Although I generally share Sunstein and Thaler's view that soft paternalism is less damaging than hard paternalism and that in many cases some form of paternalism is inevitable, I respectfully disagree with their view that this type of paternalism "should be acceptable to even the most ardent libertarian."' Soft paternalism is neither innocuous nor obviously benign. If abused by a less than perfect government, soft paternalism can make decisions worse, just like hard paternalism. As George Loewenstein and Ted O'Donoghue argue, soft paternalism towards an activity essentially creates a psychic tax on that activity that provides no revenues, which can be much worse than hard paternalism. ' Hard paternalism in the form of tax rates or bans is easy to monitor and control; soft paternalism is not. Soft paternalism often relies on stigmatizing behavior like smoking, drinking or homosexuality, and this can and has led to dislike or hatred of those individuals who continue to engage in the disapproved activities. Moreover, soft paternalism will surely increase support for hard paternalism, (...truncated)


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Edward L. Glaeser. Paternalism and Psychology, The University of Chicago Law Review, 2006, Volume 73, Issue 1,