Incentives and Behavior Prof. Dr. Heiner Schumacher KU Leuven 12. Libertarian Paternalism Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 1 / 32
Introduction Additional Literature Thaler, Richard, and Cass Sunstein (2008): Nudge - Improving Decisions About Health, Wealth and Happiness , Penguin Books, London, England. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 2 / 32
Introduction Paternalism is de…ned as measures taken by the state, which limit some person’s liberty or autonomy for their own good. In the last chapter we saw that a certain degree of paternalism may well be warranted when it comes to …nancial decision making (e.g. force people to save for retirement). However, economists (in particular, the famous Chicago school) usually oppose state paternalism. Individuals are assumed to know their own good better than the state does. In this chapter, we will see that there is a third way, “libertarian paternalism”, that may causes people to make better decisions (like paternalism), but without limiting their freedom (hence, “libertarian”). Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 3 / 32
Introduction As a motivating example, consider the problem facing the director of a company cafeteria who discovers that the order in which food is arranged in‡uences the choices people make (recall “framing”). She has three alternative strategies: (1) she could make choices that she thinks would make the customers best o¤; (2) she could make choices at random; (3) she could make choices that she thinks would make the customers as obese as possible. She has to make one choice. So what is the optimal one? Option 1 seems paternalistic, but the other options clearly make no sense. Option 1 does not a¤ect the customers’ freedom, it just makes them to behave in a more healthy way. This is the idea behind libertarian paternalism. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 4 / 32
Introduction Overview Defaults Framing and Information Provision Social Norms Product Design Critique Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 5 / 32
Defaults People often have to make important decisions while having little information on the subject. This makes the default action extremely important, i.e., the option that is implemented if an individual does not make an active choice. Consider a …rm that o¤ers a savings plan where employees are automatically enrolled unless they explicitly opt out; and a …rm that o¤ers a savings plan without automatic enrollment (the default action is not to join). Madrian and Shea (2001) found out that automatic enrollment can increase participation rates from 49% to 86%. 1 Another important application of defaults are organ donations. 1 Madrian, Brigitte, and Dennis Shea (2001): “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,” Quarterly Journal of Economics 116 (4), 1149 - 1187. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 6 / 32
Defaults Demand for organs greatly exceeds supply. By the end of 2008 there were more than 97000 persons on the waiting lists for organs (mostly kidneys) in the United States. Most of them (around 60%) will die because there are not su¢ciently many donors. The major obstacle to increasing donations is the need to get the consent of the family members of the (potential) donor. We will see that the share of donors depends on how consent is elicited. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 7 / 32
Defaults Explicit Consent. Concrete steps are necessary to register as an organ donor. Routine Removal. The state owns the rights to body parts of people who are dead and can remove their organs without asking anyone’s permission (this rule is not used by any state). Presumed Consent. All citizens would be presumed to be consenting donors, but they have the opportunity to register their unwillingness to donate. The following graph displays the performance of these rules in a number of countries. Interpret the results! Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 8 / 32
Defaults Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 9 / 32
Defaults Johnson and Goldstein (2003) analyzed this issue in an online survey. 2 They asked people whether they would be willing to be donors. There were three conditions: explicit consent (one click to become a donor), presumed consent (one click to become a non-donor) and mandated choice (one click to become either a donor or a non-donor). So essentially, only the default action is varied between the conditions. The next graph shows the experimental outcome. Again, interpret the results! 2 Johnson, Eric, and Daniel Goldstein (2003): “Do Defaults Save Lives?,” Science 302(5649), 1338 - 1339. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 10 / 32
Defaults Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 11 / 32
Defaults Presumed consent is not without problems. First, it is often overruled by family members if they are asked by doctors whether organs can be used or not. Second, it is hard to sell politically (one cannot just presume anything he wants). Hence, the best option in this case is mandated choice (e.g., a requirement that you check a box stating your organ donation preferences). Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 12 / 32
Framing and Information Provision One of the most cost-e¤ective ways to change behavior is to provide easy-to-understand information on complex issues. A good example is fuel e¢ciency of cars. In Europe, customers compare fuel e¢ciency using the number “liters per kilometer”. In the US, customers compare “miles per gallon” (MPG). These two number essentially measure the same thing. However, note that the relationship between gas used and MPG is curvilinear. Consequently, the two number may produce di¤erent behavioral patterns. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 13 / 32
Framing and Information Provision Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 14 / 32
Framing and Information Provision Consider the following experiment by Larrick and Soll (2008). 3 In an online survey, they presented subjects the following scenario: “A town maintains a ‡eet of vehicles for town employee use. It has two types of vehicles. Type A gets 15 MPG. Type B gets 34 MPG. Each car in the ‡eet is driven 10,000 miles. There are two plans for replacing the original cars with corresponding hybrid models. The goal is to reduce the gas consumption of the ‡eet. Option 1 is to replace the 100 vehicles that get 15 MPG with vehicles that get 19 MPG. Option 2 is to replace the 100 vehicles that get 34 MPG with vehicles that get 44 MPG.” In a control treatment, the scenario was the same but additionally all numbers were presented as GPM (gallons-per-100 miles), which is easier to understand. What options did subjects choose? 3 Larrick, Richard, and Jack B. Soll (2008): “The MPG Illusion,” Science 320(5883), 1593 - 1594. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 15 / 32
Framing and Information Provision In the MPG-treatment, 75% of subjects chose Option 2 (which of course is wrong). In the GPM-treatment, 64% of subjects chose Option 1. So the percentage choosing the more fuel-e¢cient option increases from 25% to 64%! The lesson here is that even the way in which numbers are presented may make a huge di¤erence! Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 16 / 32
Social Norms When uncertain what to do, many individuals follow the behavior of others (“social norms”). Making this behavior salient can change behavior. Allcott (2011) conducts a …eld experiment with customers of a utility company in the USA. 4 They received letters in which their energy use was compared with that of their neighbors. The letters also contained energy conservation tips. This intervention resultet in energy savings of 2 percent. 4 Allcott, Hunt (2011): “Social Norms and Energy Conservation,” Journal of Public Economics 95(9–10), 1082–1095. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 17 / 32
Social Norms Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 12. Libertarian Paternalism 18 / 32
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