Whitman on Libertarian Paternalism and the Public-Private Distinction

Josh Wright —  22 July 2009

Here’s a great post from Glen Whitman on libertarian paternalism as applied to mortgages and the housing market.  Glen takes Richard Thaler to task for his NY Times piece discussing behavioral economics in the mortgage market and advocating defaults for “plain vanilla” mortgages.  Glen’s primary beef is that Thaler ignores the distinction between private and public action:

The distinction matters. The case of ski-slope markings is the market principle at work. Skiers want to know the difficulty of slopes, and so the owners of ski resorts provide it. They have a profit incentive to do so. This is not at all coercive, and it is no more “paternalist” than a restaurant identifying the vegetarian dishes. Public bureaucrats don’t have the same incentives at all. They don’t get punished by consumers for failing to provide information, or for providing the wrong information. They don’t suffer if they listen to the wrong experts. They face no competition from alternative providers of their service. They get to set their own standards for “success,” and if they fail, they can use that to justify a larger budget. And Thaler knows this, because these are precisely the arguments made by the “critics” to whom he is responding. His response is just a dodge, enabled by his facile use of language and his continuing indifference – dare I say hostility? – to the distinction between public and private.

Read the whole thing.  Glen also takes on Thaler’s response to critics’ arguments that regulators will also suffer from behavioral biases and thus we can safely ignore the insights of behavioral economics for law.  Thaler argues that bureaucrats can rely on experts and that outsourcing to experts can mitigate these biases for regulators.  Glen rightly counters that regulators do not face the same incentives to select the right experts as private actors.

I’d like to add another point here that I do not frequently see discussed in the literature involving behavioral economics and consumer protection/ antitrust with which I’m familiar and where there is at least some discussion that the insights of behavioral economics can produce a “better” model of firm behavior (and not just consumers).  If it is true that these individual biases do not afflict regulators, as Thaler argues, because they have the incentives and ability to use experts — isn’t the same likely to hold for firms?  There is much talk in the antitrust literature about the possibility of systematically irrational behavior (e.g. more predation than the rational choice models would predict).  But don’t firms have even better incentives to use experts to avoid these decisions than regulators? Alternatively, if both firms and regulators are behaviorally biased — I’m not sure we have a coherent map from there to implications for antitrust policy.