Ed Glaeser writes
I present three simple models that show how endogenous cognitive errors increase the advantage of private decisionmaking over public decisionmaking, which suggests that recognizing the limits of human cognition pushes us away, not towards, paternalism. In these models, as the bounds to human rationality increase, the quality of government decisionmaking decreases even faster than the quality of private decisionmaking.
The first model hinges on the fact that consumers face stronger incentives to get things right than government decisionmakers do when making decisions about private individuals. In the second model, the supply of error comes from a private firm that is trying to increase demand. If the cost of persuading one government bureaucrat is less than the cost of persuading millions of consumers, then government bureaucrats will be more prone to error than private consumers.
The final model looks at the electoral process and relies on the fact that individuals have stronger incentives when making consumption decisions than when taking part in an election to choose a leader who will make consumption decisions for them.
Glaeser's essay was referred to by
a story in The Economist, which was referenced in
their editorial, which was blogged by
Mark Thoma, which I noticed while scanning
Economics Roundtable.
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