Behavioral Economics and Public Policy: A Pragmatic Perspective

Abstract

The debate about behavioral economics -the incorporation of insights from psychology into economics -is often framed as a question about the foundational assumptions of economic models. This paper presents a more pragmatic perspective on behavioral economics that focuses on its value for improving empirical predictions and policy decisions. I discuss three ways in which behavioral economics can contribute to public policy: by offering new policy tools, improving predictions about the effects of existing policies, and generating new welfare implications. I illustrate these contributions using applications to retirement savings, labor supply, and neighborhood choice. Behavioral models provide new tools to change behaviors such as savings rates and new counterfactuals to estimate the effects of policies such as income taxation. Behavioral models also provide new prescriptions for optimal policy that can be characterized in a non-paternalistic manner using methods analogous to those in neoclassical models. Model uncertainty does not justify using the neoclassical model; instead, it can provide a new rationale for using behavioral nudges. I conclude that incorporating behavioral features to the extent they help answer core economic questions may be more productive than viewing behavioral economics as a separate subfield that challenges the assumptions of neoclassical models.

Behavioral Welfare Economics and FDA Tobacco Regulations

“…Fortunately, practitioners conducting regulatory CBAs required by Executive Order 12866 can look to the rapidly growing body of academic research on behavioral welfare economics (Mullanaithan et al 2012, Chetty 2015. Our paper helps bridge research on behavioral welfare economics in general to the specific context of FDA tobacco regulations.…”

“…In terms of Figures 1 or 3, the structural parameter estimates can be used to identify both the Observed Demand curve and the Rational Demand curve. Chetty (2015) points out that behavioral welfare economics based on structural estimation relies on strong modeling assumptions. This is particularly problematic when results are highly model-specific.…”

“…A third and less-developed approach to behavioral welfare economics is to use data from surveys of subjective well-being (Chetty 2015). Surveys of subjective well-being (SWB) ask respondents to rate their happiness or life-satisfaction.…”

“…The following section uses a simple two-period model to develop expressions for the impact of tobacco control policies on social welfare. Our model is an example of the reduced-form approach to behavioral welfare economics (Mullainathan et al 2012, Chetty 2015. Our model includes: nudge and paternalistic regulations; an excise tax on cigarettes; internalities created by period 1 versus period 2 consumption; and externalities from cigarette consumption.…”

Nudges, consideraciones normativas de sus objetivos y métodos

“…Indeed, most of the examples illustrated by Thaler and Sunstein seek to help people to get healthier and wealthier by assuming that this is what they want; therefore, policymakers could defend their use under a paternalistic justification and argue that 'nudged individuals are always better off independently of their preferences' (Guala & Mittone, 2015, p. 386) Beyond individual wellbeing, some authors have considered the advantages of using nudges to tackle social problems. Nudges can be useful in resolving issues where the need for intervention is already justified by traditional economic grounds, for instance, in cases of externalities, public goods and information asymmetry (Chetty, 2015;Loewenstein & Chater, 2017). For instance, Guala & Mittone (2015) argue in favour of using nudges to solve public policy problems, particularly to correct externalities.…”