Thursday, February 3, 2011

Time Horizons And The Welfare State

Via RortyBomb, FLG found this paper about behavioral economics and the welfare state.

According to neoclassical economics, people wouldn't take welfare if it was going to make them worse off:
Microeconomic theory emphasizes, moreover, that choices with immediate benefits and long-run costs are still made optimally. If a teenage girl decides to have an out-of-wedlock child and go on welfare, it is because she has determined that the up-front benefits of the child and the government's financial assistance outweigh the long-run costs of foregone earnings and diminished marriage prospects. Basic micro is a one-size-fits-all theory of choice: Trade-offs between two immediate benefits are of one cloth with trade-offs between immediate and more distant benefits.

But the authors offer a possible behavioral explanation:
The perverse effects frequently attributed to the welfare state are easy to interpret from a behavioral perspective. If people overestimate the magnitude of immediate benefits relative to more distant ones [FLG here. That's short-time horizons for those of you keeping score at home.], you can actually — on net — harm them by offering them additional immediate benefits. They already tend to under-invest.

However, they also state:
A high discount rate may well be part of the story, but reducing it to that alone seems forced. Indeed, when Banfield elaborates, his account is almost explicitly behavioral: 'the individual's orientation toward the future will be regarded as a function of two factors: (1) ability to imagine a future, and (2) ability to discipline oneself to sacrifice present for future satisfaction.' (1968, p. 47) The former strongly suggests judgmental bias; the latter, lack of self-control.

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