The Law and Economics of Behavioral Regulation

Abstract

Governments and organizations increasingly use behavioral regulation (“nudging”) to substitute for and complement traditional instruments, often treating it as “a free lunch.” However, a closer analysis of nudges reveals that they can generate substantial private costs rather than benefits alone. Nudges thus require the same cost-benefit scrutiny demanded of traditional regulation, but the quantification of nudge costs can be difficult and time-consuming, and is rare in practice. A rationality-effects analysis, based on a more nuanced understanding of how nudges change behavior, can indicate whether a given nudge is likely harmful, potentially beneficial, or should be prioritized for cost-benefit analysis before its implementation.

Keywords: Behaviral Law and Economics, Nudging, Rationality, Cost-Benefit Analysis, Cost-Effectiveness Analysis

JEL Classification: D61, D90, D91, H40, K29