When Smaller Menus Are Better: Variability in Menu-Setting Ability

The economics literature on choice focuses on individuals’ decisions when faced with a given menu. However, the menu itself is often the result of pre-selection by a menu setter. We develop a model to study the relation between the ability of the menu setter and the size and quality of the menu. We show that when the cost of increasing the size of the menu is sufficiently small, a lower-ability menu setter optimally offers more items in the menu than a higher-ability menu setter. Nevertheless, the menu optimally offered by a higher-ability menu setter remains superior to the menu optimally offered by a lower-ability menu setter. This results in a negative relation between menu size and menu quality, i.e., a smaller menu is better than a larger menu. We illustrate this result empirically in the context of 401(k) plans, where we show a negative relation between the number of investment choices in a 401(k) plan and the quality of the optimal portfolio achievable given those investment choices.