Policy consequences of limited cognitive ability

Gilles Saint-Paul

Research output: Contribution to journalArticlepeer-review

Abstract

This paper analyses the welfare effects of price restrictions on private contracting in a world where agents have a limited cognitive ability. We deal with that by assuming that people compute the costs and benefits of entering a transaction with an error. We first discuss an example of an auction that will attract the least efficient buyers, because these are those who have made the largest mistake. We then study the case for government intervention when the government knows the distribution of true costs and benefits as well as that of errors. By imposing constraints on transaction prices, the government eliminates some that are on average inefficient - because the price signals that one of the parties has typically grossly overestimated its benefit from participation. This policy may increase aggregate welfare even though some of the transactions being blocked are actually efficient.

Original languageEnglish (US)
Pages (from-to)97-105
Number of pages9
JournalSpanish Economic Review
Volume6
Issue number2
DOIs
StatePublished - 2004

Keywords

  • Cognitive ability
  • Intelligence
  • Minimum wages
  • Paternalism
  • Price control
  • Regulation

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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