Ulric B. and Evelyn L. Bray Seminar in Political Economy

Behavioral economics presents a "paternalistic" rationale for intervention by a benevolent government. This paper studies the desirability of various forms of collective action when government decisions are determined via the political process in response to votes by time inconsistent voters. We consider an economy where the only "distortion" is the agents time inconsistency. We first examine a fully decentralized economy where agents can make private "investments" in a commitment technology.  We show that the demand for commitment is non monotone with the degree of time inconsistency, with agents with intermediate intensity of present bias exhibiting the highest value of commitment. We then study several forms of collective action. If only commitment decisions are centralized, commitment investment is often more moderate than if all decisions are centralized. Welfare consequences of full centralization (of both commitment and consumption decisions) are ambiguous and depend on the distribution of time inconsistency in the population.