10) Imperfect People

Question 1

Bounded rationality?

Answer 1

• if small costs of information, computation, attention, adjustment, then it is rational to behave in what seems irrational way

Question 2

Salience of the present?

Answer 2

how people disproportionately value immediate costs and benefits over future ones

Question 3

Predictions from salience of present?

Answer 3

1) procrastination
2)dynamic inconsistency
3)awareness of procrastination

Question 4

Ways to fix salience of the present?

Answer 4

1) Sophistication, education and self-control
2)raise the price of doing it tomorrow (Rules)

Question 5

What is paternalism?

Answer 5

-government intervention to counteract present bias

Question 6

Difference between beta and delta?

Answer 6

-beta is how much you care about future TODAY

-delta is how you value present consumption over future periods (not just the present).

Question 7

Alternative to paternalism ?

Answer 7

-nudges

Question 8

What is nudges?

Answer 8

-nudge people by changing default

Question 9

Why nudges rather than paternalism?

Answer 9

we do not know preferences, but with nudges you can choose if default is your optimum or not

Question 10

Nudges used by firms?

Answer 10

-gym membership

Question 11

How do we stop short-sightedness in politics?

Answer 11

-implement term limits and elections, which ensure turnover and accountability

Question 12

What do elections lead to ?

Answer 12

-short sightedness
-using model of salience of present

Question 13

Predictions of model for elections?

Answer 13

-polarization
-electoral uncertainty and fiscal adjustments
-fiscal rules

Question 14

Polarization?

Answer 14

More radical or polarized governments will borrow more, increasing government debt

as they know this is their one chance

Question 15

Electoral Uncertainty and Fiscal Adjustments?

Answer 15

As electoral uncertainty increases, governments delay necessary fiscal adjustments (e.g., tax increases or spending cuts)

Question 16

Fiscal rules?

Answer 16

Binding fiscal rules can constrain short-sighted fiscal policies and reduce debt accumulation.

Question 17

When working optimal for public spending what do we equate?

Answer 17

-MRS = MRT

of private goods and public goods

societal benefit from additional public spending matches the cost of providing it

Question 18

If voters are uniform distrubuted how do 2 parties act?

Answer 18

-try to get close to 0.5 public spending out of 1

Question 19

What happens to distribution of view to public spending with more inequality?

Answer 19

-more skewed
-as more unequal

Question 20

What does political equilibrium reflect in any distribution other than uniform?

Answer 20

-preferences of median voter not the mean