When Do Nudges Increase Welfare?

25.05.2022 14:15 – 15:45

INSTITUTE OF ECONOMICS AND ECONOMETRICS SEMINAR

(Joint with William Morrison, and Dmitry Taubinsky)

Abstact:

“Nudges,” such as simplified information disclosure and warning labels, have become increasingly popular policy instruments over the past 15 years. Much of the public discussion and empirical work focuses on whether these instruments produce large behavior change at low implementation cost, instead of more economically founded metrics of social welfare. We lay out a theoretical framework to understand the effects of nudges on social surplus in the presence of imperfect competition, externalities, and consumer bias. A key lesson is the importance of targeting: whether the intervention has the largest effects on the most biased consumers. We show that even if the intervention has no implementation cost and moves behavior in the “right” direction on average, the intervention can still generate significant efficiency losses if it is poorly targeted. Interventions that are not very well-targeted—including those that strictly increase the quality of consumer decision-making but in highly unequal ways—are imperfect substitutes for traditional corrective policies such as taxes. We combine the theory with two randomized experiments to evaluate fuel economy labels on cars and health warning labels on sugary drinks.

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