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Now a Word Endorsing Behavioral Economics

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Despite my previous post [2] expressing criticism of behavioral economics (BE) as a source of justifications for government regulation, I am quite fascinated with BE and find much of it important and compelling.

At the moment, I’m reading a top-quality collection of papers in BE, Advances in Behavioral Economics [3] (Colin Camerer, George Lowenstein, & Matthew Rabin, eds.). I recommend it.

Also, just yesterday my George Mason colleagues and I enjoyed an outstanding presentation by Moses Shayo, a PhD-economics student at Princeton. He uses BE findings in a refined and productive way to help explain differences in the extent of redistributive taxation across countries.

Here’s the abstract of the paper.

People care about the group they identify with while seeking to resemble the members of that group. At the same time the pattern of social identities is endogenous: people are more likely to identify with a group the more similar they are to that group and the higher its status. In this paper I show how a model with these features concisely captures a vast experimental literature and accounts for such phenomena as ingroup bias, cooperation and conformity. I apply this general model to the political economy of redistribution, focusing on class and national identities. Using data from a large set of democracies I find evidence supporting the main predictions of the model, namely: (a) that the poor are more likely to have a nationalist identity than the rich; (b) that controlling for income, nationalist identification reduces support for redistribution and (c) that across democracies there is a strong negative relationship (R²>0.6) between the prevalence of nationalist identification and the level of redistribution. The model points to common national threats and to diversity within the lower class as factors that may reduce redistribution, and suggests the possibility that rising inequality may lead to less demand for redistribution.

You can find the paper itself here [4].

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