Psychological factors in welfare and policy design

Naik, Canishk Vasanttilak (2025) Psychological factors in welfare and policy design. PhD thesis, London School of Economics and Political Science.

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Abstract

This thesis investigates the role of psychological factors in the design of optimal policy, focusing on mental health and the social safety net. Around 1 billion people suffer from mental disorders [WHO, 2022], and those with poor mental health are disproportionately likely to live in poverty [Lund et al., 2010]. Mental disorders cause significant disturbances in cognition, emotion regulation, and everyday functioning [Hammar and Årdal, 2009], yet their role in economic policy design remains understudied. Chapters 1 to 3 build on my Job Market Paper, which focuses on whether social assistance effectively reaches people with poor mental health. • Chapter 1 develops a theoretical framework showing how take-up responses to policy separately identify the marginal value of benefits (need) and the cost of barriers. • Chapter 2 presents new empirical facts about mental health and the targeting of social assistance using Dutch administrative data. • Chapter 3 combines the theory and empirics to show that people with poor mental health have a 2× higher need for benefits yet face a 64% higher cost from barriers. I also show that reducing barriers would be twice as effective as increasing benefits. While Chapters 1 to 3 take a revealed preference approach, a question remains: should the planner normatively respect the observed choices of people with poor mental health? Chapter 4 (with Daniel Reck) generalises this idea, tackling the fundamental challenge of behavioural welfare economics: psychological factors can cause inconsistencies, forcing policymakers to take a stand on which choices reflect an individual’s true normative preferences. We show that incorporating normative uncertainty leads to a structured welfare criterion, and explore how the resulting notion of robustness shapes optimal policy in several examples. Throughout the thesis, I argue that understanding psychological mechanisms, and their normative consequences, is essential for designing effective policies.

Item Type:	Thesis (PhD)
Additional Information:	© 2025 Canishk Vasanttilak Naik
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HV Social pathology. Social and public welfare. Criminology R Medicine > RA Public aspects of medicine
Sets:	Departments > Economics
Supervisor:	Ashraf, Nava and Reck, Daniel and Spinnewijn, Johannes
URI:	http://etheses.lse.ac.uk/id/eprint/4888

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