This article offers a brief overview of second best reasoning, sketches the theory and provides an example that illustrates the mechanics behind. The theory aims to identify the distortions generated by an economic friction that restraints a decision maker, using a three-step procedure: (i) compute the optimal choice of a decision maker in a frictionless environment (the first best solution); (ii) compute the optimal choice when an additional constraint due to the friction is added to the analysis (the second best solution); (iii) determine the disturbing effects of the friction by comparing the two solutions.
Second best
PANICO, CLAUDIO
2013
Abstract
This article offers a brief overview of second best reasoning, sketches the theory and provides an example that illustrates the mechanics behind. The theory aims to identify the distortions generated by an economic friction that restraints a decision maker, using a three-step procedure: (i) compute the optimal choice of a decision maker in a frictionless environment (the first best solution); (ii) compute the optimal choice when an additional constraint due to the friction is added to the analysis (the second best solution); (iii) determine the disturbing effects of the friction by comparing the two solutions.
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