Peter Diamond is Institute Professor and Professor of Economics at Massachusetts Institute of Technology.

Hannu Vartiainen is Docent of the Helsinki School of Economics and Research Director of the Yrjö Jahnsson Foundation

In the last decade, behavioral economics, borrowing from psychology and sociology to explain decisions inconsistent with traditional economics, has revolutionized the way economists view the world. But despite this general success, behavioral thinking has fundamentally transformed only one field of applied economics-finance. Peter Diamond and Hannu Vartiainen's Behavioral Economics and Its Applications argues that behavioral economics can have a similar impact in other fields of economics.

In this volume, some of the world's leading thinkers in behavioral economics and general economic theory make the case for a much greater use of behavioral ideas in six fields where these ideas have already proved useful but have not yet been fully incorporated--public economics, development, law and economics, health, wage determination, and organizational economics. The result is an attempt to set the agenda of an important development in economics--an agenda that will interest policymakers, sociologists, and psychologists as well as economists.

Contributors include Ian Ayres, B. Douglas Bernheim, Truman F. Bewley, Colin F. Camerer, Anne Case, Michael D. Cohen, Peter Diamond, Christoph Engel, Richard G. Frank, Jacob Glazer, Seppo Honkapohja, Christine Jolls, Botond Koszegi, Ulrike Malmendier, Sendhil Mullainathan, Antonio Rangel, Emmanuel Saez, Eldar Shafir, Sir Nicholas Stern, Jean Tirole, Hannu Vartiainen, and Timothy D. Wilson.

TABLE OF CONTENTS:

Foreword ix
List of Contributors xi

Chapter One: Introduction by Peter Diamond and Hannu Vartiainen 1

Chapter Two: Behavioral Public Economics: Welfare and Policy Analysis with Nonstandard Decision-Makers by B. Douglas Bernheim and Antonio Rangel 7
2.1 Introduction 7
2.2 Conceptualizing and MeasuringWelfare 10
2.3 Saving 20
2.4 Addiction 40
2.5 Public Goods 57
2.6 The Road Ahead 66
Comment by Nicholas Stern 78
Comment by Emmanuel Saez 81

Chapter Three: Psychology and Development Economics by Sendhil Mullainathan 85
3.1 Introduction 85
3.2 Immediate Barriers to Education 86
3.3 Demand for Commitment, Default Settings, and Savings 90
3.4 Defaults and Financial Institutions 95
3.5 Status Quo Bias and Diffusion of Innovations 97
3.6 Self-Serving Bias and Evaluation 102
3.7 Interesting Further Directions 104
3.8 Concluding Observations 110
Comment by Anne Case 113

Chapter Four: Behavioral Law and Economics by Christine Jolls 115
4.1 Introduction 115
4.2 The Endowment Effect in Behavioral Economics and Behavioral Law and Economics 116
4.3 The Modern Domain of Behavioral Law and Economics 121
4.4 Illustrative Applications of Behavioral Law and Economics 126
4.5 Debiasing through Law 137
4.6 Conclusion 140
Comment by Ian Ayres 145
Comment by Christoph Engel 148

Chapter Five: Fairness, Reciprocity, andWage Rigidity by Truman F. Bewley 157
5.1 Introduction 157
5.2 AreWages and Salaries Downwardly Rigid? 157
5.3 Evidence from Surveys by Economists 160
5.4 Evidence from Experimental Economics 170
5.5 Evidence from Organizational Psychology and Managerial Science 176
5.6 Conclusion 181
Comment by Seppo Honkapohja 188

Chapter Six: Behavioral Economics and Health Economics by Richard G. Frank 195
6.1 Introduction and Background 195
6.2 Models of Physician Behavior 197
6.3 Health-Care Demand and Insurance 213
6.4 Final Observations 217
Comment by Jacob Glazer 223
Comment by Botond Koszegi 230

Chapter Seven: Behavioral Economics of Organizations by Colin F. Camerer and Ulrike Malmendier 235
7.1 Introduction 235
7.2 Complicating the Single-Agent Risk-Incentive Model 237
7.3 Workers as Members of Multi-Agent Firms 248
7.4 Top Managers and Corporate Finance 258
7.5 Implications for Corporate Governance 267
7.6 Organizational Reactions: Sorting, Repairs, and Exploitation 268
7.7 Conclusion 272
Comment by Michael D. Cohen 281

Chapter Eight: Wrap-Up Panel 291
8.1 The Problematic Content and Context of Decisions: Comment by Eldar Shafir 291
8.2 Comment by Jean Tirole 294
8.3 Comment by Timothy D.Wilson 299
8.4 Comment by Peter Diamond 301
8.5 General Discussion 304

Index 309

Review:

"Diamond and Vartiainen offer an important, timely collection of essays on behavioral economics...The authors' approach is refreshing in that they make clear they are not interested in defending behavioral economics against more traditional economics."--H. Winter, Choice

Endorsements:

"This is an excellent and important volume outlining cutting-edge developments in behavioral economics and its applications. It is coherent, substantive, and topical. Indeed, it could serve as a leading text or reader on behavioral economics."--Geoffrey Hodgson, University of Hertfordshire, England

"I learned a substantial amount from reading this thought-provoking book, which contains several pioneering attempts to broaden behavioral economics from positive to normative analyses. I congratulate the editors on having collected so many intriguing contributions from so many prominent scholars."--Martin Dufwenberg, University of Arizona