Reforming Development Economics With a Nudge: How Can the Policies Proposed by Behavioral Economics be Used to Improve International Development Policy?

Abstract

With the deadline for the achievement of the Millennium Development Goals coming up, innovations are urgently needed in the fight for global development; behavioral economics have been put forward as one such innovation. After providing the reader with background on the current state of behavioral economics, we discuss the justifications for the wider use of behavioral policies based on the ways in which poverty affects economic behavior in the context of developing countries. After doing so, and building upon those findings, we evaluate different proposals for the wider inclusion of behavior-based elements in development settings and establish what behavioral economics’ key areas of relevance in shaping development policy are. We find that those areas are centered around two institutional factors – missing commitment devices and lacking market integration – and two behavioral traits – high preference for current consumption and high loss and risk aversion. Finally, we shortly assess the potential of those policy proposals in being scaled up and reforming development policy.

Keywords: Development Economics, Behavioral Economics, International Development, Nudge, Poverty, Policy, Commitment Devices, Market Integration, Consumption, Reform