Academic journal article Agricultural and Resource Economics Review

The Behavioral Welfare Paradox: Practical, Ethical and Welfare Implications of Nudging

Academic journal article Agricultural and Resource Economics Review

The Behavioral Welfare Paradox: Practical, Ethical and Welfare Implications of Nudging

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Decades after the introduction of behavioral economics as a subdiscipline, behavioral economics has come into its own as an applied policy tool. The UK was the first to make a serious national push to include behavioral economic considerations in policy when it launched the Behavioural Insights team within the Cabinet Office.1 The United States followed suit, creating the White House Social and Behavioral Sciences Team (SBST), which was established by executive order in 2015.2 The mission of each of these groups is to make government efforts more efficient by using behavioral nudges. Such nudges should not change the structure or function of government programs or policies, but simply make the programs function at a lower cost or higher yield through the use of behavioral interventions. With this mandate, behavioral economics became much more than a theoretical exercise. Now dozens of behavioral nudges have been implemented on a massive scale, affecting the lives of hundreds of millions.

A comprehensive list of such interventions would be difficult to compile and would distract from the main points of this article. Many of these efforts have been summarized in the annual report of the SBST (2016), and the publications section of the Behavioural Insights Team website (BIT, 2017). This includes policies designed to ensure that children have access to free or reduced-price lunch by expanding automatic enrollment (Sunstein 2014, Ralston and Newman 2015), reframing information on how social security benefits may differ depending on when they are claimed (Brown, Kapteyn and Mitchell 2011), and tax forms that encourage greater redemption of tax credits (Lindsey 2010).

The success of behavioral approaches has come through the promise of improved results without backlash. Here the results are defined by the policy in question. In the case of enrollment in the school lunch program, better results are those in which more of those eligible for free or reduced-price school lunch are enrolled in the program. By definition, a behavioral nudge cannot alter the choice set but only alter the way in which the individual perceives that choice set. By not altering the choice set, the decision maker would have little reason to feel harmed by the nudge. If this is the case, we would expect that true nudges will create no backlash.

In a fundamental way, behavioral economic policy sets aside the long tradition of economics as a normative discipline. While much of economics is positive (being used to describe behavior), much of the work on policy analysis is normative in nature, seeking policies that maximize social welfare. Indeed, the foundations of behavioral economics are at complete and total odds with the foundations of welfare economics. There have been a few attempts to reconcile this rift (e.g., Bernheim and Rangel 2007, K?szegi and Rabin 2007). Attempts to extend welfare theory to behavioral results must either set aside the empirical keystone of welfare theory - revealed preference - or they must limit revealed preference within the confines of a single behavioral treatment or context. Either of these routes raises significant questions about the validity of application as a policy tool.

In what follows I will discuss the implications of behavioral economics for welfare theory and also the implications of welfare theory for behavioral economics. I will argue that behavioral economics makes revealed preference arguments untenable in most situations in which behavioral policy can be implemented. For this reason, it is at once more important to make moral arguments for behavioral policy, and more important to recognize that policy is being made based solely on moral arguments.

Welfare Economics

The primary purpose of welfare economics is to evaluate the overall impact of economic policy on the wellbeing of the affected individuals. We generally use some set of assumptions about how to balance the tradeoffs in wellbeing of various actors in the economy. …

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