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Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics

Dec 2007
Working Paper
07-031
By  B. Douglas Bernheim, Antonio Rangel
This paper proposes a choice-theoretic framework for evaluating economic welfare with the following features. (1) In principle, it is applicable irrespective of the positive model used to describe behavior. (2) It subsumes standard welfare economics both as a special case (when standard choice axioms are satisfied) and as a limiting case (when behavioral anomalies are small). (3) Like standard welfare economics, it requires only data on choices. (4) It is easily applied in the context of specific behavioral theories, such as the β, δ model of time inconsistency, for which it has novel normative implications. (5) It generates natural counterparts for the standard tools of applied welfare analysis, including compensating and equivalent variation, consumer surplus, Pareto optimality, and the contract curve, and permits a broad generalization of the of the first welfare theorem. (6) Though not universally discerning, it lends itself to principled refinements.