Policy Implications of Suboptimal Choice: Theory and Evidence
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
- Chair: Dmitry Taubinsky, University of California-Berkeley
Ramsey strikes back: Optimal commodity taxes and redistribution in the presence of salience effects
AbstractAn inﬂuential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than diﬀerential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. This paper allows for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. We show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes follow the classic “many person Ramsey rule” (Diamond, 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. We extend this result to the setting of corrective taxes, and show how nonsalient corrective taxes should be adjusted for distributional reasons.
Borrowing to Save? The Impact of Automatic Enrollment on Debt
AbstractHow much of the retirement savings induced by automatic enrollment is offset by increased borrowing outside the retirement savings plan? We study a natural experiment created when the U.S. Army began automatically enrolling its newly hired civilian employees into the Thrift Savings Plan (TSP) at a default contribution rate of 3% of income. We find that four years after hire, as a percent of first-year annualized salary, automatic enrollment raises cumulative employer plus employee TSP contributions by 5.7% on average. However, automatic enrollment’s effect on wealth net of debt is only 3.5% of first-year salary on average, representing a 38% crowd-out. We cannot reject the hypothesis that all of the increase in employee contributions induced by automatic enrollment is financed by debt, and that saving increases only because of the employer match.
Optimal Defaults with Normative Ambiguity
AbstractA large and growing literature suggests that decision-makers are more likely to select options presented to them as the default. Numerous decision-making models can potentially explain the presence of default effects. However, such models differ in their implications for the link between choices and welfare, and are difficult to distinguish empirically. In this paper, we study how alternative explanations for default effects shape conclusions about optimal policy. We utilize a simple and general framework that nests most models of default effects that have been described in the literature. The model parameterizes the degree to which default effects arise due to a welfare-relevant preference versus a mistake on the part of decision-makers. When this parameter is unknown – a situation we refer to as normative ambiguity – determining the optimal default is often impossible. We apply this framework to data on 401(k) plan contributions and find that the optimal policy is to promote active choices when less than 6 to 9 percent of employees’ revealed opt-out costs (about $120 to $180) are welfare-relevant, and otherwise to minimize opt-outs.
Paternalism and Pseudo-rationality
AbstractResource allocations are jointly determined by the actions of social planners and households. In this paper we highlight the distinction between planner optimization and household optimization. We show that planner optimization is a substitute for household optimization and that this is true even when there are information asymmetries, so that households know more about their preferences than planners. Our analysis illustrates the scope for misattribution in economic analysis. Are seemingly optimal allocations caused by optimizing households, or are such allocations caused by planners who paternalistically influence myopic and passive households? We show that widely studied allocative optimality conditions that are implied by household optimization also arise in an economy with a rational planner who uses default savings and Social Security to influence the choices of non-optimizing households. Many classical optimization conditions do not resolve the question of household optimization. Pseudo-rationality arises when rational planners elicit approximately optimal behavior from non-optimizing households.
- H0 - General
- D6 - Welfare Economics