TAILIEUCHUNG - Lecture Economics (9/e): Chapter 22 - David C. Colander

Chapter 22 - Behavioral economics and modern economic policy. After reading this chapter, you should be able to: Explain the relationship between behavioral economic policy and mechanism design; define nudge and choice architecture and explain how they are related to behavioral economic policy; discuss the problems of implementing nudges and how the behavioral economic frame changes how policy is viewed. | Nobody’s ever gone broke underestimating the intelligence of the general public. ―. Mencken Behavioral Economics and Modern Economic Policy Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain the relationship between behavioral economic policy and mechanism design Discuss the problems of implementing nudges and how the behavioral economic frame changes how policy is viewed Define nudge and choice architecture and explain how they are related to behavioral economic policy Discuss the concerns many traditional economists have about nudge and push policies 2 Behavioral Economic Policy in Perspective Economic engineering is economics devoted not only to studying markets, but also to designing markets and other coordinating mechanisms Behavioral economics broadens the assumptions about behavior to: Purposeful behavior Enlightened self-interest Behavioral economic policy is economic policy based upon models using behavioral economic building blocks that take into account people’s predictable irrational behavior 3 Behavioral Economics and Economic Engineering Coordination mechanisms are methods of coordinating people’s wants with other people’s desires Shadow prices are prices that aren’t paid directly, but instead are paid in terms of opportunity cost borne by the demander, and thus determine his or her choices indirectly Shadow price analysis allows you to take morals and social pressures into account in your models For example, when the American League instituted the designated hitter, the quantity of bean balls thrown rose 4 Modern Economists as Reverse Engineers Economists who use mechanism design engineering to develop policy take an existing mechanism apart with the intention of improving it Mechanism design involves identifying a goal and then designing a mechanism such as a market, social system, or contract to achieve that end Mechanism design economic engineers use laboratory experiments, field .

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