Friday, July 24, 2009

When Does Libertarian Paternalism Work?

New NBER Working Paper

Bruce Ian Carlin, Simon Gervais, Gustavo Manso

NBER Working Paper No. 15139
Issued in July 2009
NBER Program(s): CF LE PE POL
---- Abstract -----

We develop a theoretical model to study the effects of libertarian paternalism on knowledge acquisition and social learning. Individuals in our model are permitted to appreciate and use the information content in the default options set by the government. We show that in some settings libertarian paternalism may decrease welfare because default options slow information aggregation in the market. We also analyze what happens when the government acquires imprecise information about individuals, and characterize its incentives to avoid full disclosure of its information to the market, even when it has perfect information. Finally, we consider a market in which individuals can sell their information to others and show that the presence of default options causes the quality of advice to decrease, which may lower social welfare.

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