Regret and Regulation |
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Authors: | Rachel J Huang Alexander Muermann Larry Y Tzeng |
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Affiliation: | 1.Graduate Institute of Finance, National Taiwan University of Science and Technology,Taipei,Taiwan;2.Department of Finance,Accounting and Statistics, Vienna University of Economics and Business,Austria;3.Department of Finance,National Taiwan University,Taipei,Taiwan |
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Abstract: | We analyse the welfare effect of governmental regulation for individuals who consider anticipated regret in their decision-making process. Although governmental policies by directing choice, distort individual decisions in the private market, they can alleviate individuals’ pain associated with the feeling of regret. We analyse this trade-off and provide conditions under which the implied reduction of regret justifies regulation. Furthermore, we demonstrate our findings on tax deduction for non-insured losses, a well-studied social policy in insurance. Last, we consider heterogenous individuals and alternative social welfare functions and show that our results hold in these extended settings. |
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