Using behavioral economics to improve regulation

I have pointed out earlier how behavior economic (BE) theories are being applied in macroeconomics and other policy issues (for instance see this on poverty and monetary policy).

I came across this superb paper from the Behavior economic stalwarts– Colin Camerer, Matthew Rabin, George Loewenstein and others. In this paper, they show how BE can be used for regulation.

 The main idea goes like this:

Regulation by the state can take a variety of forms. Some regulations are aimed entirely at redistribution, such as when we tax the rich and give to the poor. Other regulations seek to counteract externalities by restricting behavior in a way that imposes harm on an individual basis but yields net societal benefits. A good example is taxation to fund public goods such as roads. In such situations, an individual would be better off if she alone were exempt from the tax; she benefits when everyone (including herself) must pay the tax.

In this paper, we are concerned with a third form of regulation: paternalistic regulations that are designed to help on an individual basis. Paternalism treads on consumer sovereignty by forcing, or preventing, choices for the individual’s own good, much as when parents limit their child’s freedom to skip school or eat candy for dinner.

So what do they offer?

Our purpose in this Article is to argue that in many cases it is possible to have one’s cake and eat it too. We propose an approach to evaluating paternalistic regulations and doctrines that we call “asymmetric paternalism.” A regulation is asymmetrically paternalistic if it creates large benefits for those who make errors, while imposing little or no harm on those who are fully rational. Such regulations are relatively harmless to those who reliably make decisions in their best interest, while at the same time advantageous to those making suboptimal choices.

Read the paper for further details. It is very lucidly written and shows how BE can be used to make regulation more effective. Though some suggestions like for suicide are going to be very difficult to implement.

Highly recommended.

2 Responses to “Using behavioral economics to improve regulation”

  1. Taxes » Using behavioral economics to improve regulation Says:

    […] Amol Agrawal wrote an interesting post today on Using behavioral economics to improve regulationHere’s a quick excerptRegulation by the state can take a variety of forms. Some regulations are aimed entirely at redistribution, such as when we tax the rich and give to the poor. Other regulations seek to counteract externalities by restricting behavior in … […]

  2. Using Behavioral economics to influence policy « Mostly Economics Says:

    […] on this subject of using findings of BE/BF for public policy. Like this one on using BE for regulation, poverty and monetary […]

Leave a Reply to Using Behavioral economics to influence policy « Mostly Economics Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: