PAM_4380_april_8_2011 - April 8, 2011 6. Litigation Bonus...

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April 8, 2011 6. Litigation Bonus Topic: 6.1 Basic Issues and Analysis Jacobson and Warner (1999) 6.2 Example: The Master Settlement Agreement Bulow and Klemperer (1998) 6.4 Example: Obesity Lawsuits Alderman and Daynard (2006). Mello, Rimm and Studdert (2003) Prelim #2: Friday, April 22
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Behavioral Economics & Taxation (brief bonus topic) Neoclassical economics Individual decisions reflect private benefits & costs & maximize utility Externalities drive wedge between private & social benefits & costs Corrective taxes can internalize negative externalities Behavioral economics Incorporates insights from psychology etc. on deviations from rational utility maximization Positive economics: develop new predictions about behavior that distinguish behavioral from neoclassical models Normative economics: new insights for welfare economics, but tricky to know what preferences should count
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Internalities Hyperbolic discounting: impatient current self imposes costs on future self (internalities) thru time-inconsistent decisions Demand for self-control mechanisms Higher taxes might make the taxed individual better off! Gruber & Koszegi (2001) calculate optimal cigarette tax that takes into account externalities + internalities Similar calculations could be made for obesity taxes Wansink’s research on ‘mindless eating’ Thaler & Sunstein discusses how to use insights from behavioral economics to create policies that ‘nudge’ people to make ‘better’ decisions
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Challenges “…standard welfare analysis is grounded in the doctrine of revealed preference. That is, we infer what people want from what they choose. When evaluating policies, we attempt to act as each individual’s proxy, extrapolating his or her likely policy choices from observed consumption choices in related situations.” “A second school of thought holds that behavioral economics can in principle justify modifying, relaxing, or even jettisoning the principle of revealed preference for the purpose of welfare analysis. A number of possibilities have been explored. If people make systematic mistakes in identifiable circumstances, it may be appropriate to apply the principle of revealed preference selectively rather than systematically. If an individual’s choices reveal several distinct sets of mutually inconsistent preferences, then normative evaluation may require the adoption of a particular perspective.” Reference: Bernheim & Rangel, Behavioral Public Economics, 2005
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PAM_4380_april_8_2011 - April 8, 2011 6. Litigation Bonus...

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