A Reduced-Form Approach to Behavioral Public Finance

Abstract

Research in behavioral public finance has blossomed in recent years, producing diverse empirical and theoretical insights. This article develops a single framework with which to understand these advances. Rather than drawing out the consequences of specific psychological assumptions, the framework takes a reduced-form approach to behavioral modeling. It emphasizes the difference between decision and experienced utility that underlies most behavioral models. We use this framework to examine the behavioral implications for canonical public finance problems involving the provision of social insurance, commodity taxation, and correcting externalities. We show how deeper principles undergird much work in this area and that many insights are not specific to a single psychological assumption.