Dalton, Patricio Santiago and Ghosal, Sayantan (2008) Behavioural decisions and welfare. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.

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Abstract

We study decision problems where (a) preference parameters are de.ned to include psychological/moral considerations and (b) there is a feedback effect from chosen actions to preference parameters. In a standard decision problem the chosen action is required to be optimal when the feedback effect from actions to preference parameters is fully taken into account. In a behavioural decision problem the chosen action is optimal taking preference parameters as given although chosen actions and preference parameters are required to be mutually consistent. Our framework unifes seemingly disconnected papers in the literature. We characterize the conditions under which behavioural and standard decisions problems are indistinguishable: in smooth settings, the two decision problems are generically distinguishable. We show that in general, revealed preferences cannot be used for making welfare judgements and we characterize the conditions under which they can inform welfare analysis. We provide an existence result for the case of incomplete preferences. We suggest novel implications for policy and welfare analysis.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Decision making, Choice (Psychology), Welfare economics, Externalities (Economics), Mathematical optimization
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	5 January 2008
Number:	No.834
Number of Pages:	33
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Royal Society (Great Britain), Fifth Framework Programme (European Commission) (FP5), Royal Economic Society (Great Britain) (RES), University of Warwick
Related URLs:	Related item in WRAP
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URI:	http://wrap.warwick.ac.uk/id/eprint/1380

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