Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 85: Markets vs. Government when Rationality Is Unequally Bounded: Some Consequences of Cognitive Inequalities for Theory and Policy

Pavel Pelikan
Additional contact information
Pavel Pelikan: Prague University of Economics and The Ratio Institute, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: Recognizing that human rationality has bounds that are unequal across individuals entails treating it as a special scarce resource, tied to individuals and used for deciding on its own uses. This causes a meta-mathematical difficulty to the axiomatic theories of human capital and resource allocation, and raises a new problem for comparative institutional analysis, allowing it to explain some so far little understood differences between markets and government. The policy implications strengthen the case against national planning, selective industrial policies, and government ownership of enterprises, but weaken the case against paternalism.

Keywords: Rationality; meta-mathematics; institutions; markets; government

JEL-codes: A10; D61; G10; H10; O16; P51

43 pages, First version: March 21, 2006. Revised: September 3, 2006.

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