Nudges That Hurt Those Already Hurting -- Distributional and Unintended Effects of Salience Nudges
42 Pages Posted: 12 Oct 2016 Last revised: 29 May 2018
Date Written: May 24, 2018
Nudges are becoming increasingly popular policy tools. Yet, distributional effects of nudges are largely unknown. We first design an economic laboratory experiment to examine the incidence of an opportunity cost reminder nudge (a salience nudge) designed to curb spending, while accounting for heterogeneity in emotional responses – specifically the pain of paying. Pain of paying is optimal for ‘unconflicted’ consumers, but too low for ‘spendthrifts’ and too high for ‘tightwads’, causing sub-optimal spending. Our empirical results imply the nudge increases pain of paying for tightwads, thereby reducing spending by tightwads, who already spend too little, while it entirely fails to reduce the spending of those who would have benefited from a spending reduction (spendthrifts). Overall, the nudge therefore reduces consumer welfare. We next examine if the adverse impact of the opportunity cost reminder nudge is explained by a general tendency for all nudges to exacerbate peoples’ underlying spending preferences. We specifically test whether a salience nudge designed to boost spending correspondingly adversely affects spendthrifts? We unexpectedly find that subjects perceive the spending booster nudge as a “spending reminder”, which again, reduces spending by tightwads only, while not affecting spending by the other consumer types. Our results highlight two important aspects of salience nudges -- given the complexity of consumer emotions and information processing, salience nudges can have undesired welfare effects, and the direction of their impact may be the opposite of what was intended.
Keywords: pain of paying, nudge, incidence, opportunity cost reminder, buy local, economic experiment
JEL Classification: D03, D12
Suggested Citation: Suggested Citation