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.
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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)