Behavioral Economics and Perverse Effects of the Welfare State

Authors

  • Scott Beaulier,

    1. Department of Economics and Management, Beloit College, Beloit, WI 53511
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  • Bryan Caplan

    1. Department of Economics and Center for Study of Public Choice, George Mason University, Fairfax, VA 22030
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    • * Scott Beaulier, Assistant Professor, Department of Economics and Management, Beloit College, Beloit, WI 53511. Email: beaulies@beloit.edu. Bryan Caplan, Associate Professor, Department of Economics and Center for Study of Public Choice, George Mason University, Fairfax, VA 22030. Email: bcaplan@gmu.edu.


  • We would like to thank Tyler Cowen, Robin Hanson, Kevin McCabe, Dan Houser, Ron Heiner, seminar participants at George Mason University, Beloit College and New York University and an anonymous referee for discussion and comments. The standard disclaimer applies.

SUMMARY

Critics often argue that government poverty programs perversely make the poor worse off by encouraging unemployment, out-of-wedlock births, and other ‘social pathologies.’ However, basic microeconomic theory tells us that you cannot make an agent worse off by expanding his choice set. The current paper argues that familiar findings in behavioral economics can be used to resolve this paradox. Insofar as the standard rational actor model is wrong, additional choices can make agents worse off. More importantly, existing empirical evidence suggests that the poor deviate from the rational actor model to an unusually large degree. The paper then considers the policy implications of our alternative perspective.

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