Behavioral Economics and Government Purchases – Some Insights into the Fiscal Psychology of Public Expenditure

Abstract

Behavioral economics has obtained increased acceptance in the field of public finance, thus challenging the neoclassical approach to human decision-making. However, so far the fundamental results of behavioral economics on cognitive heuristics, illusions, and biases with respect to human information processes, judgments and choices were primarily applied to the analysis of taxation and public debt. In contrast, up to now comparable examinations of public expenditure are not very common. To address this shortcoming, the paper offers a review of the existing behavioral economic research on public spending and government expenditure policy.As a challenge to the neoclassical approach to human decision-making, behavioral economics have obtained increasing acceptance either in the field of public finance for some time. How-ever, so far the fundamental results of behavioral economics on cognitive heuristics, illusions and biases with respect to human information processes, judgements and choices were pri-marily applied to the analysis of taxation and public debt. In contrast, comparable examinations of public expenditure are not very common up to now. For this reason, the paper gives a review of the existing behavioral economic research on public spending and governmental expenditure policy.