Stefanie Haeffele and Virgil Henry Storr
Over time, the fields of economics and ethics have become more distinct with economics focusing on the rationality of actors, the incentives they face, and the outcomes of interacting within an amoral market setting. However, in the real world, economics and ethics are more interconnected. Humans are social and ethical beings regardless of setting. Recent studies have shown that individuals reward trustworthiness, punish dishonesty, and can develop meaningful social bonds within markets. Economists, seeking to better understand the world, should incorporate ethics into their economics. We argue that Adam Smith is an exemplar of pursuing a fuller approach to social science, and utilize his arguments on both economics and ethics to advance a study of ethical markets.
Praveen K. Kopalle and Robert Hansen
There has been much interest in pricing strategies and tactics both in the research and practice domains. This chapter examines the recent literature on pricing with a focus on blending an economics approach with that of marketing. It begins with a brief discussion of the fundamental principles of optimal pricing, which serves as the foundation for the more advanced pricing methods. The chapter provides an in-depth discussion in the areas of second degree price discrimination, bundling strategies, revenue management, pricing using conjoint analysis, dynamic pricing, price psychology, personalized pricing, competitive considerations in pricing (Nash and Stackelberg games), dynamic structural models in pricing, and pricing in two-sided markets. The end of the chapter provides brief concluding remarks.
This chapter considers the psychological, methodological, and normative paths taken by behavioral law and economics (“BLE”) and alternative paths that BLE might have taken, and might still take. The counterfactual BLE imagined here focuses on performing behavioral analyses of legal problems rather than promoting the heuristics and bias view of judgment and decision-making to compete with law and economics’ rational actor model. This change in focus would give priority to empirical studies in which particular legal institutions and specific legal tasks are simulated or studied in situ rather than to studies of abstract and general judgment and decision-making problems that may provide more theoretical bang but have less clear applied payoff in specific legal contexts.
Susan Griffin and Karl Claxton
Cost-effectiveness analysis (CEA) is intended to help collective purchasers of health care to determine which interventions to prioritize, by ranking them according to the cost of each unit of “health benefit” they produce. The primary focus of this article is on the social decision-making approach where the decision-maker's objective is assumed to be the maximization of health gains subject to a given budget constraint. This article begins with the rationale for presenting a full characterization and analysis of uncertainty within any CEA. An overview of methods that can be used to conduct a CEA that accounts for uncertainty is provided, including the means to present and interpret the results. The benefits and limitations of the methods for analyzing uncertainty are considered in the context of providing information to decision-makers. The article concludes by discussing the additional questions that arise when the need for further research to support those decisions is considered.
Moses L. Pava
The essence of this article happens to be the art of moral criticism amidst the Jewish tradition. Moral criticism, or as the Torah puts it rebuke (tokhehah), is a necessary activity for social learning and improvement. Moral criticism is part of a give and take among individuals who must necessarily share, at least, a minimal set of core values, including most importantly respect for one another, a common ethical vocabulary, and a basic moral grammar. Each one of us, simply by virtue of being human, inherits a moral tradition. As we grow and mature we slowly become its spokespersons. Rebuke or moral criticism is one of the many moral responsibilities that come with advancing maturity and wisdom. It can take on many different forms. A series of discussions, mostly rhetorical in nature follows. Introspecting questions along such as what are my motives along with substantial analysis concludes this article.
Giorgio d'Agostino, J. Paul Dunne, and Luca Pieroni
The earlier literature regarding the effects of military expenditures on economic growth had initially shown a positive relationship between the two variables. This article examines this topic, taking account of more recent models of growth. The second section considers the alternative general economic theories that inform the development of models to undertake empirical analyses. The third section considers estimation issues. The fourth section considers the alternative formal models that are common in the literature: the Feder–Ram model, the modified Solow model, and the endogenous growth models. The fifth section presents some empirical results to illustrate the issues involved in estimating the models and to compare their performance. The estimation of more sophisticated models indicates, contrary to the early studies, that the effect of military expenditures on growth is negative.
Minglian Li and Justin Tobias
This article is of two-fold interest with the goal of providing an overview of the field and aims at discussing the most recent research in the relevant field. It shows how the computational methods and modelling ideas are being used by Bayesian econometricians. It also discusses linear models and presents a review of the normal linear regression model, deriving marginal, conditional, and predictive posterior densities of interest. This article proceeds further to discuss hierarchical linear models and review approaches to handle endogeneity problems. It presents applications and posterior simulation strategies for nonlinear latent variable models and considers the analysis of treatment effects models and multinomial and multivariate probit models. This article briefly reviews basic Bayesian approaches to the analysis of duration data.
After contrasting behavioral criminal law and economics with the retributivist tradition and with traditional criminal law and economics, the chapter illustrates how various behavioral phenomena can be used to predict the effects of criminal law norms and to design criminal law in a way that serves social goals, in particular deterrence. It explores the effects of uncertainty on deterrence; it examines the effects of prospect theory and the differential effects of future uncertainty (prediction) and past uncertainty (postdiction) on the propensity to commit crime. It also investigates the effects of overoptimism on the propensity to commit crime. Last the chapter discusses the literature on happiness and its relevance to the optimal design of criminal law. It establishes that the literature on happiness can be used to promote retributive justice concerns. The chapter concludes by examining critically the potential contribution of behavioral studies to the optimal design of criminal law norms.
Melvin A. Eisenberg
Classical contract law, Chicago economics, and Chicago law-and-economics all assumed that people rationally maximize their utility. However, just as classical contract law was supplanted by modern contract law, so Chicago-style law-and-economics is being supplanted by a school of law-and-economics based on behavioral psychology or behavioral economics. The shift to behavioral law-and-economics, which is still under way, has arrived in three waves. The first wave showed that actors often make decisions without being fully informed, without adequately processing the available information, and without bringing to consciousness critical assumptions that underlay their decisions. The second wave showed that in certain areas, actors systematically make decisions that are not rational. The third wave shows that in making decisions, contracting actors are often motivated by moral principles as well as by wealth-enhancement.
Tom Baker and Peter Siegelman
Because choosing insurance requires consumers to assess risks and probabilities, the demand for insurance has proven to be fertile ground for identifying deviations from rational behavior. Consumers often shun the insurance against large losses that they rationally should want (e.g., floods); and they are attracted to insurance against small losses (extended warranties, low deductibles) that no rational individual should purchase. But the welfare consequences of behavioral anomalies in insurance are complex, because consumers’ irrational behavior takes place in a market profoundly shaped by informational asymmetries. Under some conditions, deviations from rational behavior may actually generate insurance market equilibria that produce greater welfare than would be achieved in a market in which all consumers are rational. This chapter summarizes the literature and discuss the legal and policy implications of this conclusion.
Numerous documented cognitive biases, including loss aversion, confirmation bias, and overconfidence, seem to work against resolution of criminal cases through plea bargaining, since doing so requires a criminal defendant to accept immediate loss (punishment) and forfeit the possibility of no loss (acquittal) in exchange for a future benefit (reduction of punishment). This chapter considers why plea bargaining is so prevalent in the US criminal justice system, notwithstanding the existence of so much potentially plea-discouraging cognitive bias. The principal explanation is that the criminal justice system is functionally designed to overcome cognitive bias in order to induce defendants to plead guilty. Incorporation of the insights of behavioral economics into plea-bargaining theory provides a more nuanced explanation of the shape of many features of our criminal justice system and casts new light on the factors that drive plea-bargaining outcomes.
Massimo Garbuio, Dan Lovallo, and Elif Ketenciouglu
Modern strategic decision theory focuses on those actions taken by senior executives (on behalf of the owners) that commit substantial resources, set precedents, and create waves of less important decisions. This chapter explores key behavioral assumptions that dispute the notion that strategic decisions are wholly rational in a neoclassical economics sense. It classifies deviations from rationality as non-standard preferences, non-standard beliefs, and non-standard decisions. Insights are provided on how behavioral economics can be applied to strategic decisions in organizational settings, and moreover on how behavioral economics can be enriched by asking questions that are unique to the role of executives making strategic decisions within firms.
David R. Just
Behavioral theory suggests a myriad other policy options that can have substantial impacts without restricting choices in any real sense. This article focuses on three general areas of research: food choice, food consumption volume, and the evaluation of foods. It discusses two primary literatures of behavioral economics and food consumption. One of these literatures seeks to apply general behavioral economic models to food consumption, while the other seeks to identify and incorporate known food psychological phenomena into models of economic behavior. It introduces many new concepts to the field of behavioral economics, and provides some promising areas for future research. Finally, it mentions that much remains to be done in terms of incorporating the important elements of food behavior, and creating and using suitable individual data to calibrate these models for policy purposes.
Edward J. McCaffery
This chapter argues that a behavioral law and economics approach to tax is deeply needed for a wider normative analysis of the impacts of law on social welfare. The absence of traditional markets to serve as arbitrage mechanisms in public finance means that suboptimal tax and fiscal systems can arise and persist for long periods of time. Most of the current scholarly applications of behavioral approaches to tax, however, fail to take into account the institutional settings in which tax laws exist. For example, the common recommendation for tax-favored savings plans to counteract a persistent individual-level myopia that leads to undersavings for many suffers from the possibility of being undercut on account of the ability to borrow tax-free under the current income tax system, combined with individual-level myopia itself. Similarly, a recent trend of scholarship that argues for “low salient” taxes to help ameliorate persistent fiscal crises (themselves exacerbated by pervasive behavioral biases playing out in a setting absent effective arbitrage mechanisms) ignores or underplays the real costs of even hidden taxes, both allocatively and distributionally. The chapter concludes that the most critical work for a behavioral law and economics approach to tax lies ahead.
Yoed Halbersberg and Ehud Guttel
The chapter discusses the contributions of cognitive psychology and behavioral studies to the research of tort law. These contributions, we show, relate to a wide range of issues in torts: from the basic decision to impose tort liability, through the choice between liability rules, to specific rules and remedies. Accordingly, behavioral studies are of particular significance for the analysis of the tort system. The literature review focuses on contributions made to three key elements of tort law: the choice between liability regimes; the choice between tort liability and regulation (including the choice between harm-based and risk-based liability); and damages (in particular, punitive damages and damages for pain and suffering). The chapter also offers two new avenues for future research: vicarious liability and people’s perceptions of the variability among large groups of tort victims.
Jonathan H.W. Tan
This chapter concerns the behavioral economics of religion. Themes considered include how religion potentially shapes individual preferences, the possible implications of religious affiliation for interaction within and between social groups, and the religious institution as a unit of the economy at large. This chapter is written with three main purposes in mind. The first is to consider different ways by which religion and economic behavior are potentially related. The second purpose of this chapter is to consider the research methods employed, especially issues regarding the identification of motives, and in turn the interpretation of results. The third purpose is to contemplate significance of results from behavioral studies for economic theory and religious practice, including ways by which different dimensions of religious background, such as religiosity and religious affiliation, relate to pro-sociality and group processes.
The present chapter maps the literature of ethical decision-making in psychology and management and examines the ways in which it could shape behavioral law and economics. The chapter examines the important paradigms and biases that have been developed in this area. Although there has been a significant advance in the understanding of ethical decision-making, conflicting paradigms attempt to describe how good people are responsible for bad deeds. The chapter explains the principal taxonomies, highlighting their strengths and weaknesses. On the normative side, the mechanisms developed by this literature uncover the limited ability of current enforcement strategies to shape behavior. The chapter makes suggestions on how to overcome these limitations and address the unaware, automatic unethical behaviors that are described by the bounded ethicality literature.
The objective of this chapter is to review and extend an emerging body of research that tests theories, models, and general predictions of human behavior—most of which are rooted in psychology—while using the point spread wagering market as the setting. The bridge between behavioral psychology and sports betting is provided by the growing field of behavioral finance, a relatively new subdiscipline of behavioral economics.