The Rise of Behavioral Economics in Regulatory Policy: Rational Choice or Cognitive Limitation?

Laboratory results and empirical examples challenging rational choice theory have increased attention toward behavioral economics. That attention has moved from academia to regulation, notably in energy efficiency policy, but more widely as an institutionalized method for justifying regulations to correct for cognitive biases or limits. However, behavioral economics short circuits attempts to explain puzzling behavior as rational responses to imperfect information and is inconsistent with measuring benefits and costs by consumer surplus estimated from revealed preference. Nevertheless, ethical assessment, rational delegation, and weakness of will challenge the direct application of conventional economics to business regulation.