In the presence of a time-inconsistency problem with agency contracts, we show that competitive markets can implement allocations that Pareto-dominate those achieved by a benevolent government, and they induce more effort. We analyze a model with moral hazard and a two-sided lack of commitment. After agents have chosen their work, firms can modify contracts and agents can switch firms. If the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals, it is Pareto superior to a government’s allocation with a complete breakdown of incentives. Moreover, competitive markets without commitment implement more effort in equilibrium under general conditions.

A nudge is a paternalistic government intervention that attempts to improve choices by changing the framing of a decision problem. We propose a welfare-theoretic foundation for nudging similar in spirit to the classical revealed preference approach, by investigating a framework in which preferences and mistakes of an agent can be elicited from her choices under different frames. We provide characterizations of the classes of behavioral models in which the information required for nudging can or cannot be deduced from choice data.

When choice is stochastic, revealed preference analysis often relies on random utility models. However, it is impossible to infer preferences without assumptions on the distribution of utility noise. We show that this difficulty can be overcome by using response time data. A simple condition on response time distributions ensures that choices reveal preferences without distributional assumptions. Standard models from economics and psychology generate data fulfilling this condition. Sharper results are obtained under symmetric or Fechnerian noise, where response times allow uncovering preferences or predicting choice probabilities out of sample. Application of our tools is simple and generates remarkable prediction accuracy.