Behavioral Economics and
Perverse Effects of the Welfare State
JEL Classifications: I3, D6, H3, D1
Keywords: behavioral economics, welfare state, poverty
Critics often argue that government poverty programs perversely make the poor worse off by
encouraging unemployment, out-of-wedlock births, and other "social pathologies."
microeconomic theory tells us that you cannot make an agent worse off by expanding his choice set.
The current paper argues that familiar findings in behavioral economics can be used to resolve this
Insofar as the standard rational actor model is wrong, additional choices can make agents
More importantly, existing empirical evidence suggests that the poor deviate from the
rational actor model to an unusually large degree.
The paper then considers the policy implications of
our alternative perspective.
We would like to thank Tyler Cowen, Robin Hanson, Kevin McCabe, Dan Houser, Ron
Heiner, seminar participants at George Mason University, Beloit College, and New York
University, and an anonymous referee for discussion and comments.
The standard disclaimer
The most compelling explanation for the marked shift in the fortunes of the poor is that
Scott Beaulier, Assistant Professor, Department of Economics and Management, Beloit College, Beloit,
Bryan Caplan, Associate Professor, Department of Economics
and Center for Study of Public Choice, George Mason University, Fairfax, VA 22030.