Regret and Regulation

Rachel Huang, Alexander Muermann () and Larry Y Tzeng ()
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Alexander Muermann: Department of Finance, Accounting and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, Building D4, A-1020 Wien, Austria.
Larry Y Tzeng: Department of Finance, National Taiwan University, #1, Sec. 4, Roosevelt Rd., Taipei, 106 Taiwan.

The Geneva Risk and Insurance Review, 2014, vol. 39, issue 1, 65-89

Abstract: We analyse the welfare effect of governmental regulation for individuals who consider anticipated regret in their decision-making process. Although governmental policies by directing choice, distort individual decisions in the private market, they can alleviate individuals’ pain associated with the feeling of regret. We analyse this trade-off and provide conditions under which the implied reduction of regret justifies regulation. Furthermore, we demonstrate our findings on tax deduction for non-insured losses, a well-studied social policy in insurance. Last, we consider heterogenous individuals and alternative social welfare functions and show that our results hold in these extended settings.

Date: 2014
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