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Limitations of Behaviorally Informed Policy Under Social Interaction

30 Pages Posted: 24 Nov 2015  

Timo Ehrig

Max Planck Institute for Mathematics in the Sciences (MPI-MIS)

Konstantinos V. Katsikopoulos

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development

Jaakko Kuorikoski

University of Helsinki - Department of Political and Economic Studies

Samuli Poyhonen

University of Helsinki - Department of Political and Economic Studies

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: September 1, 2015

Abstract

Nudge and boost are two competing approaches to applying the psychology of reasoning and decision making to improve policy. Proponents of both the approaches claim capacity to enhance social welfare through better individual decisions. We question the validity of this claim. First, individual rationality is neither sufficient nor necessary for improving collective outcomes. Second, collective outcomes of complex interactions among individuals are largely ignored by the focus of both nudge and boost on individual decisions. We suggest that the design of mechanisms and norms can sometimes lead to better collective outcomes than nudge and boost. More generally, we present conditions under which the three approaches enhance social welfare. Furthermore, we argue that to reliably improve collective outcomes that depend on the aggregation of many decisions, it is necessary to understand the interface between the psychology of reasoning and decision making on the one hand and economics and policy on the other.

Keywords: Behaviorally informed policy, institution design, nudge, boost, individual decisions, social welfare

JEL Classification: C90, D71, D78, L51, P21

Suggested Citation

Ehrig, Timo and Katsikopoulos, Konstantinos V. and Kuorikoski, Jaakko and Poyhonen, Samuli and Sunder, Shyam, Limitations of Behaviorally Informed Policy Under Social Interaction (September 1, 2015). Available at SSRN: https://ssrn.com/abstract=2685912 or http://dx.doi.org/10.2139/ssrn.2685912

Timo Ehrig

Max Planck Institute for Mathematics in the Sciences (MPI-MIS) ( email )

Leipzig
Germany

Konstantinos V. Katsikopoulos

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development ( email )

Lentzeallee 94
D-14195 Berlin
Germany
+49-(0)30-82406-354 (Phone)

HOME PAGE: http://ntfm.mpib-berlin.mpg.de/mpib/FMPro?-db=MPIB_Mitarbeiter.FP5&-lay=L1&-format=MPIB_Mit.htm&-op=

Jaakko Kuorikoski

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

Samuli Poyhonen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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