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How should a Behavioral Economist do Welfare Economics? H Lorne Carmichael W Bentley MacLeod¤ Queen’s University University of Southern California July 2002 Abstract Economists use the standard rational model to predict behaviour under a new policy regime and to evaluate the policy according to its impact on the welfare of the people a¤ected. Experimental observation of behaviour casts some doubt on the predictive accuracy of the standard model, but the more realistic behavioral alternatives often provide a poor basis for normative evaluations. This paper suggests that in some cases we can do both. A behavioral trait can be modeled as a cognitive strategy that has evolved to augment a deeper notion of personal welfare. This makes it possible to predict behaviour with greater accuracy and to make normative evaluations of the outcomes of policy. JEL Classi…cation: D0 Keywords: bargaining, fairness, property rights, endowment e¤ect, framing ¤The ideas in this paper were …rst presented at Queen’s University in April of 1994 and at a conference on evolutionary modelling at Wilfred Laurier University in August of 1995. The authors would like to thank Jennifer Arlen, Jordi Brandts, Don Cox, Jack Hirschleifer, Hervé Moulin, Vai-Lam Mui, Louis Putterman, Vernon Smith, Matthew Spitzer and Dan Usher for helpful comments, many other people for encouragement, and would also like to thank the S.S.H.R.C. of Canada and the National Science Foundation, grant SBR- 9709333, for …nancial support of this project. 1 A methodological divide has arisen in the theory of economic behaviour. In order to account for their expe