In this paper, we examine the problems facing a policy maker who observes inconsistent choices made by agents who are boundedly rational. We contrast a model-less and a model-based approach to welfare economics. We make the case for the model-based approach and examine its advantages as well as some problematic issues associated with it.
Bibliographical noteFunding Information:
We have greatly benefitted from exchanges with Douglas Bernheim and the comments of the Editors, for which we are grateful. We also thank the audience at the San Sebastian Summer School in Welfare Economics at which we vented some preliminary ideas contained in this paper. Mariotti gratefully acknowledges financial support through a Leverhulme Fellowship. Both authors acknowledge financial support from the ESRC through grant RES-000-22-3474.
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- bounded rationality
- choice theory