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Optimal defaults with normative ambiguity

Jacob Goldin and Daniel Reck

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Default effects are pervasive, but the reason they arise is often unclear. We study optimal policy when the planner does not know whether an observed default effect reflects a welfare-relevant preference or a mistake. Within a broad class of models, we find that determining optimal policy is impossible without resolving this ambiguity. Depending on the resolution, optimal policy tends in opposite directions: either minimizing the number of non-default choices or inducing active choice. We show how these considerations depend on whether active choosers make mistakes when selecting among non-default options. We illustrate our results using data on pension contribution defaults.

JEL-codes: J1 (search for similar items in EconPapers)
Date: 2020-06-19
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (6)

Published in Review of Economics and Statistics, 19, June, 2020, pp. 1-45. ISSN: 0034-6535

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