Welfare Policy Flashcards
What is Behavioural Welfare Economics (BWE)?
BWE analyses welfare by considering behavioural deviations from standard assumptions—such as time inconsistency, framing, and preference reversals—emphasising experienced utility over revealed preference.
What is Chetty’s (2015) pragmatic approach to behavioural public policy?
Start from a policy question (e.g. savings rates), then incorporate behavioural factors only if they improve empirical predictions or policy outcomes—minimising paternalism.
What is the difference between decision utility and experienced utility?
Decision utility is inferred from choices, assuming rationality. Experienced utility is based on actual well-being, e.g. happiness or life satisfaction. They often diverge.
What is Libertarian Paternalism (Thaler & Sunstein, 2003)?
A philosophy that nudges people toward better outcomes (as judged by themselves), while preserving freedom of choice. Examples include default options and framing effects.
What are examples of nudges as discussed in Thaler & Sunstein (2003)?
Default enrolment in pensions, rearranging food in cafeterias, reminder systems, simplification of choices, and use of salience and social norms.
What policy tools are discussed by Chetty et al. (2014) in the context of retirement savings?
They compare tax subsidies (effective only for active savers) vs defaults (effective for passive savers). Defaults dramatically increase saving with minimal cost.
What does Layard (2006) propose as a response to positional externalities?
A corrective tax on income or consumption to internalise negative externalities arising from social comparisons. Justified by evidence that others’ income reduces happiness.
How do Di Tella et al. (2001) use SWB to analyse inflation and unemployment trade-offs?
They estimate SWB costs of inflation and unemployment, finding that unemployment has a far greater psychic cost, which informs optimal macroeconomic policy.
What are Harsanyi’s actual vs informed preferences?
Actual preferences are revealed in choices; informed preferences are what individuals would prefer if fully informed and rational. Welfare should be based on informed preferences.
What are internalities and how do they relate to behavioural policy?
Internalities are self-imposed costs due to errors like projection bias. Policies (like nudges or taxes) may correct them, e.g. overconsumption early in life due to neglecting adaptation.
What does the MINDSPACE framework outline?
MINDSPACE: Messenger, Incentives, Norms, Defaults, Salience, Priming, Affect, Commitments, Ego. It describes behavioural levers for public policy interventions.
What are the key criticisms of using subjective well-being (SWB) for policy?
SWB captures only one dimension of utility; people adapt to bad circumstances; happiness measures may conflict with autonomy or revealed preference-based policy.
