Using behavioral economics to address development

This paper from Sendhil Mullainathan looks at how we can apply the various findings in BE to address development problems. Infact it is a great literature survey on the subject.

Economists conceptualize a world populated by calculating, unemotional maximizers. This view shapes our understanding of many crucial elements of development economics–from how rural villagers save, to how parents decide on whether to send their children to school.

Psychological research, however, has documented the incompleteness of this perspective. Individuals have self-control and time inconsistency problems. They can give into shortrun temptations and later regret it. They can have strong feelings about others that drive them to commit both generous and spiteful acts. They often passively accept defaults rather than make active choices. They let the institutions around them make choices for them. And they may misread new data in a ways that fit their beliefs. In short, the rational maximization model may not be a very good approximation of human behavior.

In this paper, I present some of the psychological evidence that I believe helps us to better understand a few core issues in development economics, such as savings, education, and property rights. This gives us new ways to interpret a variety of behaviors in these contexts, and enriches the set of policy tools we should consider. This evidence also suggests not only the need for dramatically new tools, but suggests small cost changes that may dramatically improve their efficacy of existing policies.

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