perfinal - Behavioral Economics and Perverse Effects of the...

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Behavioral Economics and Perverse Effects of the Welfare State Scott Beaulier Bryan Caplan * JEL Classifications: I3, D6, H3, D1 Keywords: behavioral economics, welfare state, poverty Abstract: Critics often argue that government poverty programs perversely make the poor worse off by encouraging unemployment, out-of-wedlock births, and other "social pathologies." However, basic 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 paradox. Insofar as the standard rational actor model is wrong, additional choices can make agents worse off. 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 applies. 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, WI 53511. Email: beaulies@beloit.edu. Bryan Caplan, Associate Professor, Department of Economics and Center for Study of Public Choice, George Mason University, Fairfax, VA 22030. Email: bcaplan@gmu.edu.
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they continued to respond, as they always had, to the world as they found it, but that we — meaning the not-poor and un-disadvantaged — had changed the rules of their world. Not of our world, just of theirs. The first effect of the new rules was to make it profitable for the poor to behave in the short term in ways that were destructive in the long term. Their second effect was to mask these long-term losses — to subsidize irretrievable mistakes. We tried to provide more for the poor and produced more poor instead. We tried to remove the barriers to escape from poverty, and inadvertently built a trap. (Charles Murray, Losing Ground , p. 9) I. INTRODUCTION A recurring criticism of the welfare state is that it perversely harms the very people it is intended to help. 1 Giving money to the poor reduces their incentive to enter the workforce, acquire experience, and eventually join the middle class. Providing welfare support for children born out-of-wedlock encourages teen pregnancy and discourages marriage, two serious impediments to escaping poverty (Herrnstein and Murray, 1994; Murray, 1984). As Murray Rothbard succinctly puts it, '[T]he easy availability of the welfare check obviously promotes present-mindedness, unwillingness to work, and irresponsibility among the recipients — thus perpetuating the vicious cycle of poverty- welfare.' (1978, p.154) There is a parallel complaint about affirmative action in higher education: It allegedly
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perfinal - Behavioral Economics and Perverse Effects of the...

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