Since Kahneman and Tversky (1979), it has been generally recognized that decision makers overweight low probabilities and underweight high probabilities. Of the several weighting functions that have been proposed, that of Prelec (1998) has the attractions that it is parsimonious, consistent with...

Evidence shows that (i) people overweight low probabilities and underweight high probabilities, but (ii) ignore events of extremely low probability and treat extremely high probability events as certain. Decision models, such as rank dependent utility (RDU) and cumulative prospect theory (CP),...

Tax evasion analysis is typically based on an expected utility theory (EUT) framework. However, this leads to several qualitative and quantitative puzzles. Given actual probabilities of audit and penalty rates the return on evasion ranges from 91-98 percent. So why don’t most of us evade?...

We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the hyperbolic model and subadditivity of time discounting. These models are extended to allow for a reference point for time as well as wealth. RT is able to account for all the 6...

The recent experience with low inflation has reopened interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. To reduce the real interest rate, and to stimulate the economy, the modern literature highlights the role of high inflationary...

The predictions of expected utility theory (EUT) applied to tax evasion are flawed on two counts: (i) They are quantitatively in error by huge orders of magnitude. (ii) Higher taxation is predicted to lower evasion, which is at variance with the evidence. An emerging literature in behavioral...

The median voter model (direct democracy) has wide applicability, but it is based on selfish voters i.e. voters who derive utility solely from 'own' payoff. The recent literature has pointed to fairness and concern for others as basic human motives that explain a range of economic phenomena. We...

The celebrated relation between inequality and redistribution is based on selfish voters who care solely about own-payoffs. A growing empirical literature highlights the importance of other regarding preferences (ORP) in voting over redistribution. We reexamine the relation between inequality...

Given actual probabilities of audit and penalty rates observed in the real world, tax evasion should be an extremely attractive gamble to an expected utility maximizer. However, in practice, one observes too much compliance relative to the predictions of expected utility. This paper considers an...