Fershtman (2001) “The Limit of Public Policy: Endogenous Preferences,” Foerder working paper 5-01

Abstract: In designing public policy it is not enough to consider the possible reaction of individuals to the chosen policy. Public policy may also affect the formation of preferences and norms in a society. The endogenous evolution of preferences, in addition to introducing a conceptual difficulty in evaluating policies, may also eventually affect actual behavior. In order to demonstrate the implications of endogenous preferences on the design of optimal public policy, we present a model in which a subsidy policy is set to encourage contributions towards a public good. However this policy triggers an endogenous preference change that results in a lower level of contribution towards the public good despite the explicit monetary incentives to raise that level. ✭ We would like to thank Ariel Rubinstein for comments and the Hammer fund for economi