Behavioral Economics and Its Applications

Peter Diamond is Institute Professor and Professor of Economics at Massachusetts Institute of Technology. Hannu Vartiainen is Docent of the Helsinki School of Economics and Research Director of the Yrjo Jahnsson Foundation

"Diamond and Vartiainen offer an important, timely collection of essays on behavioral economics...The authors' approach is refreshing in that they make clear they are not interested in defending behavioral economics against more traditional economics."--H. Winter, Choice "Because the material for this book comes from a well organized conference, editors Diamond and Vartiainen had a good place to start when putting the volume together. Even with excellent source material, it is easy to take a wrong turn, but the editors never make that mistake. For non-specialists, this book serves as an excellent introduction to the cross-disciplinary investigation described as behavioral economics. The chapters offer a fine overview of the main branches of study. As a collection, the book strikes a careful balance between the competing goals of comprehensive coverage and digestible length. Recommended."--Wayne Edwards, Journal of Economic Issues

• Foreword ix List of Contributors xi Chapter One: Introduction by Peter Diamond and Hannu Vartiainen 1 Chapter Two: Behavioral Public Economics: Welfare and Policy Analysis with Nonstandard Decision-Makers by B. Douglas Bernheim and Antonio Rangel 7 2.1 Introduction 7 2.2 Conceptualizing and MeasuringWelfare 10 2.3 Saving 20 2.4 Addiction 40 2.5 Public Goods 57 2.6 The Road Ahead 66 Comment by Nicholas Stern 78 Comment by Emmanuel Saez 81 Chapter Three: Psychology and Development Economics by Sendhil Mullainathan 85 3.1 Introduction 85 3.2 Immediate Barriers to Education 86 3.3 Demand for Commitment, Default Settings, and Savings 90 3.4 Defaults and Financial Institutions 95 3.5 Status Quo Bias and Diffusion of Innovations 97 3.6 Self-Serving Bias and Evaluation 102 3.7 Interesting Further Directions 104 3.8 Concluding Observations 110 Comment by Anne Case 113 Chapter Four: Behavioral Law and Economics by Christine Jolls 115 4.1 Introduction 115 4.2 The Endowment Effect in Behavioral Economics and Behavioral Law and Economics 116 4.3 The Modern Domain of Behavioral Law and Economics 121 4.4 Illustrative Applications of Behavioral Law and Economics 126 4.5 Debiasing through Law 137 4.6 Conclusion 140 Comment by Ian Ayres 145 Comment by Christoph Engel 148 Chapter Five: Fairness, Reciprocity, andWage Rigidity by Truman F. Bewley 157 5.1 Introduction 157 5.2 AreWages and Salaries Downwardly Rigid? 157 5.3 Evidence from Surveys by Economists 160 5.4 Evidence from Experimental Economics 170 5.5 Evidence from Organizational Psychology and Managerial Science 176 5.6 Conclusion 181 Comment by Seppo Honkapohja 188 Chapter Six: Behavioral Economics and Health Economics by Richard G. Frank 195 6.1 Introduction and Background 195 6.2 Models of Physician Behavior 197 6.3 Health-Care Demand and Insurance 213 6.4 Final Observations 217 Comment by Jacob Glazer 223 Comment by Botond Koszegi 230 Chapter Seven: Behavioral Economics of Organizations by Colin F. Camerer and Ulrike Malmendier 235 7.1 Introduction 235 7.2 Complicating the Single-Agent Risk-Incentive Model 237 7.3 Workers as Members of Multi-Agent Firms 248 7.4 Top Managers and Corporate Finance 258 7.5 Implications for Corporate Governance 267 7.6 Organizational Reactions: Sorting, Repairs, and Exploitation 268 7.7 Conclusion 272 Comment by Michael D. Cohen 281 Chapter Eight: Wrap-Up Panel 291 8.1 The Problematic Content and Context of Decisions: Comment by Eldar Shafir 291 8.2 Comment by Jean Tirole 294 8.3 Comment by Timothy D.Wilson 299 8.4 Comment by Peter Diamond 301 8.5 General Discussion 304 Index 309