Document Type
Book Chapter
Publication Date
2013
DOI
https://doi.org/10.1093/acprof:oso/9780199570515.003.0020
Abstract
It has long been recognized that individuals' preferences adapt to the social, economic and legal environment in which they take part, in addition to reacting to incentives and constraints given these preferences. Therefore, the design of such incentives via legislation or regulation should better take into account also its own effect on preferences, in order to avoid endogenous preference adaptation curtailing the designer's aims. Furthermore, the endogeneity of preferences poses a dilemma to the social planner whether to maximize welfare having in mind the original preferences of individuals, or rather the preferences that emerge endogenously with the intervention mechanism. This chapter outlines a general formulation of the design problem with endogenous preferences, and demonstrates its use with a prominent example — the design of incentives for bilateral trade under asymmetric information. The chapter shows how different timings of the intervention ex post, interim or ex ante have different effects on the endogenous preferences that emerge, and on the extent of divergence between the original and the adapted preferences.
Disciplines
Banking and Finance Law | Finance | Law
Recommended Citation
Aviad Heifetz, Ella Segev & Eric L. Talley,
Legislation with Endogenous Preferences,
The Handbook of Market Design, Nir Vulkan, Alvin E. Roth & Zvika Neeman (Eds.), Oxford University Press
(2013).
Available at:
https://scholarship.law.columbia.edu/faculty_scholarship/4568