IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
In recent years, many governments started designing so-called “behavioral interventions” and using “nudges” (a term coined by Richard Thaler and Cass Sunstein) to promote certain types of behavior. Those interventions rely on insights from psychology and behavioral economics to better understand how to shape people’s behavior. The stated motivation for those interventions is to improve people’s choice for themselves, or to increase the general social welfare. For instance, a growing number of countries adopt a presumed consent (opt-out) system regarding organ donation in order to increase consent rates. In those countries, if a person does not make an explicit choice whether to donate his organs in case of death, he is by default registered as ‘consenting’. This policy relies on behavioral evidence that people persistently follow default options. Thus, in those countries, the donation rate is strikingly higher than in countries using an explicit-consent model (opt-in).
Despite the excitement around this policy relevant field, some concerns were raised. Nudges utilize behavioral biases in order to direct an individual’s behavior to a certain desired decision by the government. People however, are usually neither aware of the biases nor of the fact those biases are used to influence their behavior. Making nudges transparent is important in democratic societies; yet, this might inhibit their effectiveness. Therefore, researchers have conducted empirical studies to investigate this tradeoff between effectiveness and transparency with respect to default nudges. Those studies demonstrate that defaults remain effective even when people become aware of them. However, defaults are not the only form of nudges, which are used by governments. Given the different psychological mechanisms that are responsible for the effectiveness of nudges, the results of default studies cannot be generalized to other nudges. Yet given the proliferation of “governmental nudges”, such research is tremendously important in democratic societies.
Therefore, in this paper we make the next step, and examine the tradeoff between transparency and effectiveness with respect to social norm nudges. Social norms nudges rely on insights from social psychology about the tendency of people to follow what other people do (descriptive norms) or think should be done (injunctive norms). For example, researchers found that informing people that the majority of people have already paid their taxes, significantly increased tax compliance. In our study on descriptive social norms, conducted through an experiment, we find that unlike what happens with default rules, disclosing the way social norms work and the purpose of using them diminishes the effect of positive social norm. These results hold only for male participants.
The general importance of investigating the transparency problem with respect to the implemented behavioral interventions by governments is clear. Nudges are advocated as freedom-preserving interventions. Therefore, the behavioral reaction of the target individuals to meaningful transparency of such interventions is a good test whether they indeed do not serve as manipulative instruments. In order to maintain their legitimacy, governments should adopt the following general rule. Nudges can be used when they maintain their effectiveness even when transparent. If people keep following the nudge even when they know it is employed and how it works, it signals their lack of objection to the specific choice. On the other hand, nudges which lose their effectiveness with different types of meaningful transparency become an illegitimate (if not transparent) or ineffective (with transparency) instrument of governmental intervention. However, to give clear policy recommendations with respect to each type of nudges, further thorough and comprehensive research is needed.
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