Archives For behavioral economics

So I’ve just finished writing a book (hence my long hiatus from Truth on the Market).  Now that the draft is out of my hands and with the publisher (Cambridge University Press), I figured it’s a good time to rejoin my colleagues here at TOTM.  To get back into the swing of things, I’m planning to produce a series of posts describing my new book, which may be of interest to a number of TOTM readers.  I’ll get things started today with a brief overview of the project.

The book is titled How to Regulate: A Guide for Policy Makers.  A topic of that enormity could obviously fill many volumes.  I sought to address the matter in a single, non-technical book because I think law schools often do a poor job teaching their students, many of whom are future regulators, the substance of sound regulation.  Law schools regularly teach administrative law, the procedures that must be followed to ensure that rules have the force of law.  Rarely, however, do law schools teach students how to craft the substance of a policy to address a new perceived problem (e.g., What tools are available? What are the pros and cons of each?).

Economists study that matter, of course.  But economists are often naïve about the difficulty of transforming their textbook models into concrete rules that can be easily administered by business planners and adjudicators.  Many economists also pay little attention to the high information requirements of the policies they propose (i.e., the Hayekian knowledge problem) and the susceptibility of those policies to political manipulation by well-organized interest groups (i.e., public choice concerns).

How to Regulate endeavors to provide both economic training to lawyers and law students and a sense of the “limits of law” to the economists and other policy wonks who tend to be involved in crafting regulations.  Below the fold, I’ll give a brief overview of the book.  In later posts, I’ll describe some of the book’s specific chapters. Continue Reading…

My paper with Judge Douglas H. Ginsburg (D.C. Circuit; NYU Law), Behavioral Law & Economics: Its Origins, Fatal Flaws, and Implications for Liberty, is posted to SSRN and now published in the Northwestern Law Review.

Here is the abstract:

Behavioral economics combines economics and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical economics in a number of decision-making situations. Emerging close on the heels of behavioral economics over the past thirty years has been the “behavioral law and economics” movement and its philosophical foundation — so-called “libertarian paternalism.” Even the least paternalistic version of behavioral law and economics makes two central claims about government regulation of seemingly irrational behavior: (1) the behavioral regulatory approach, by manipulating the way in which choices are framed for consumers, will increase welfare as measured by each individual’s own preferences and (2) a central planner can and will implement the behavioral law and economics policy program in a manner that respects liberty and does not limit the choices available to individuals. This Article draws attention to the second and less scrutinized of the behaviorists’ claims, viz., that behavioral law and economics poses no significant threat to liberty and individual autonomy. The behaviorists’ libertarian claims fail on their own terms. So long as behavioral law and economics continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, “libertarian paternalism” will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty, it will pose a significant risk of reducing both.

Download here.


From the WSJ:

White House regulatory chief Cass Sunstein is leaving his post this month to return to Harvard Law School, officials said Friday.

Mr. Sunstein has long been an advocate of behavorial economics in setting policy, the notion that people will respond to incentives, and has argued for restraint in government regulations. As such, he was met with skepticism and opposition by some liberals when he was chosen at the start of the Obama administration.

As administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget, his formal title, Mr. Sunstein led an effort to look back at existing regulations with an eye toward killing those that are no longer needed or cost effective. The White House estimates that effort has already produced $10 billion in savings over five years, with more to come.

“Cass has shown that it is possible to support economic growth without sacrificing health, safety and the environment,” President Barack Obama said in a statement. He said these reforms and “his tenacious promotion of cost-benefit analysis,” will “benefit Americans for years to come.”

Even so, conservatives point to sweeping new regulations for the financial sector and health care in arguing that the administration has increased the regulatory burden on businesses.

Mr. Sunstein will depart this month for Harvard, where he will rejoin the law school faculty as the Felix Frankfurter Professor of Law and Director of the Program on Behavioral Economics and Public Policy.

It will be interesting to hear, once Professor Sunstein returns to an academic setting, his views on whether and in what instances — aside from the CFPB — behavioral economics actually had much impact on the formation of regulatory policy within the Administration.

Given the enthusiasm for application of behavioral economics to antitrust analysis from some corners of the Commission and the academy, I found this remark from Alison Oldale at the Federal Trade Commission interesting (Antitrust Source):

Behavioral economists are clearly correct in saying that people and firms are not the perfect decision makers using perfect information that they are portrayed to be in many economic models. But alternative models that incorporate better assumptions about behavior and which give us useful ways to understand the likely effects of mergers, or particular types of conduct, aren’t there yet. And in the meantime our existing models give us workable approximations. So we haven’t done much yet, but we’ll keep watching developments.

For myself, I wonder whether the first place behavioral economic analysis might be brought to bear on antitrust enforcement will be in areas like coordinated effects or exchange of information. These are areas where our existing theories are not very helpful. For example when looking at coordinated effects in merger control the standard approach focuses a lot on incentives to coordinate. But there are lots and lots of markets where firms have an incentive to coordinate but they don’t seem to be doing so. So it seems there is a big piece of the puzzle that we are missing, and perhaps behavioral economics will be able to tell us something about what to look at in order to get a better handle when coordination is likely in practice.

I certainly agree with the conclusion that the behavioral economics models are not yet ready for primetime.  See, for example, my work with Judd Stone in Misbehavioral Economics: The Case Against Behavioral Antitrust or my series of posts on “Nudging Antitrust” (here and here).

Yale Law Journal has published my article on “The Antitrust/ Consumer Protection Paradox: Two Policies At War With One Another.”  The hat tip to Robert Bork’s classic “Antitrust Paradox” in the title will be apparent to many readers.  The primary purpose of the article is to identify an emerging and serious conflict between antitrust and consumer protection law arising out of a sharp divergence in the economic approaches embedded within antitrust law with its deep attachment to rational choice economics on the one hand, and the new behavioral economics approach of the Consumer Financial Protection Bureau.  This intellectual rift brings with it serious – and detrimental – consumer welfare consequences.  After identifying the causes and consequences of that emerging rift, I explore the economic, legal, and political forces supporting the rift.

Here is the abstract:

The potential complementarities between antitrust and consumer protection law— collectively, “consumer law”—are well known. The rise of the newly established Consumer Financial Protection Bureau (CFPB) portends a deep rift in the intellectual infrastructure of consumer law that threatens the consumer-welfare oriented development of both bodies of law. This Feature describes the emerging paradox that rift has created: a body of consumer law at war with itself. The CFPB’s behavioral approach to consumer protection rejects revealed preference— the core economic link between consumer choice and economic welfare and the fundamental building block of the rational choice approach underlying antitrust law. This Feature analyzes the economic, legal, and political institutions underlying the potential rise of an incoherent consumer law and concludes that, unfortunately, there are several reasons to believe the intellectual rift shaping the development of antitrust and consumer protection will continue for some time.

Go read the whole thing.

The FTC is having a conference in the economics of drip pricing:

Drip pricing is a pricing technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process. The additional charges can be mandatory charges, such as hotel resort fees, or fees for optional upgrades and add-ons. Drip pricing is used by many types of firms, including internet sellers, automobile dealers, financial institutions, and rental car companies.

Economists and marketing academics will be brought together to examine the theoretical motivation for drip pricing and its impact on consumers, empirical studies, and policy issues pertaining to drip pricing. The sessions will address the following questions: Why do firms engage in drip pricing? How does drip pricing affect consumer search? Where does drip pricing occur? When is drip pricing harmful? Are there efficiency justifications for the practice in some situations? Can competition prevent firms from harming consumers through drip pricing? Can consumer experience or firm reputation limit harm from drip pricing? What types of policies could lead to improved consumer decision making and under what circumstances should such policies be applied?

The workshop, which will be free and open to the public, will be held at the FTC’s Conference Center, located at 601 New Jersey Avenue, N.W., Washington, DC. A government-issued photo ID is required for entry. Pre-registration for this workshop is not necessary, but is encouraged, so that we may better plan for the event.

Here is the conference agenda:

8:30 a.m.   Registration
9:00 a.m. Welcome and Opening Remarks
Jon Leibowitz, Chairman, Federal Trade Commission    
9:05 a.m. Overview of Drip Pricing
Mary Sullivan, Federal Trade Commission  
9:15 a.m. Consumer and Competitive Effects of Obscure Pricing
Joseph Farrell, Director, Bureau of Economics, Federal Trade Commission
9:45 a.m.  Theories of Drip Pricing
Chair, Doug Smith, Federal Trade Commission
[Presentation] David Laibson, Harvard University
[Presentation] Michael Baye, Indiana University
[Presentation] Michael Waldman, Cornell University
[Comments] Discussion leader
Michael Salinger, Boston University
11:15 a.m.  Morning Break
11:30 a.m.  Keynote Address
Amelia Fletcher, Chief Economist, Office of Fair Trading, UK
12:00 p.m Lunch
1:00 p.m. Empirical Analysis of Drip Pricing
Chair, Erez Yoeli, Federal Trade Commission
Vicki Morwitz, New York University
Meghan Busse, Northwestern University
Sara Fisher Ellison, Massachusetts Institute of Technology
[Comments] Discussion leader
Jonathan Zinman, Dartmouth College
2:30 p.m. Afternoon Break
2:45 p.m. Public Policy Roundtable
  Moderator, Mary Sullivan, Federal Trade Commission

Michael Baye, Indiana University

Sara Fisher Ellison, Massachusetts Institute of Technology

Rebecca Hamilton, University of Maryland
  David Laibson, Harvard University
  Vicki Morwitz, New York University
  Michael Salinger, Boston University
  Michael Waldman, Cornell University
  Florian Zettelmeyer, Northwestern University
  Jonathan Zinman, Dartmouth College
3:45 p.m.  Closing Remarks

I’ve posted to SSRN an article written for the Antitrust Law Journal symposium on the Neo-Chicago School of Antitrust.  The article is entitled “Abandoning Chicago’s Antitrust Obsession: The Case for Evidence-Based Antitrust,” and focuses upon what I believe to be a central obstacle to the continued evolution of sensible antitrust rules in the courts and agencies: the dramatic proliferation of economic theories which could be used to explain antitrust-relevant business conduct. That proliferation has given rise to a need for a commitment to develop sensible criteria for selecting among these theories; a commitment not present in modern antitrust institutions.  I refer to this as the “model selection problem,” describe how reliance upon shorthand labels and descriptions of the various “Chicago Schools” have distracted from the development of solutions to this problem, and raise a number of promising approaches to embedding a more serious commitment to empirical testing within modern antitrust.

Here is the abstract.

The antitrust community retains something of an inconsistent attitude towards evidence-based antitrust.  Commentators, judges, and scholars remain supportive of evidence-based antitrust, even vocally so; nevertheless, antitrust scholarship and policy discourse continues to press forward advocating the use of one theory over another as applied in a specific case, or one school over another with respect to the class of models that should inform the structure of antitrust’s rules and presumptions, without tethering those questions to an empirical benchmark.  This is a fundamental challenge facing modern antitrust institutions, one that I call the “model selection problem.”  The three goals of this article are to describe the model selection problem, to demonstrate that the intense focus upon so-called schools within the antitrust community has exacerbated the problem, and to offer a modest proposal to help solve the model selection problem.  This proposal has two major components: abandonment of terms like “Chicago School,” “Neo-Chicago School,” and “Post-Chicago School,” and replacement of those terms with a commitment to testing economic theories with economic knowledge and empirical data to support those theories with the best predictive power.  I call this approach “evidence-based antitrust.”  I conclude by discussing several promising approaches to embedding an appreciation for empirical testing more deeply within antitrust institutions.

I would refer interested readers to the work of my colleagues Tim Muris and Bruce Kobayashi (also prepared for the Antitrust L.J. symposium) Chicago, Post-Chicago, and Beyond: Time to Let Go of the 20th Century, which also focuses upon similar themes.

WSJ has an interesting story about the growing number of employer efforts to import “game” like competitions in the workplace to provide incentives for employees to engage in various healthy activities.  Some of these ideas sound in the behavioral economics literature, e.g. choice architecture or otherwise harnessing the power of non-standard preferences with a variety of nudges; others are just straightforward applications of providing incentives to engage in a desired activity.

A growing number of workplace programs are borrowing techniques from digital games in an effort to encourage regular exercise and foster healthy eating habits. The idea is that competitive drive—sparked by online leader boards, peer pressure, digital rewards and real-world prizes—can get people to improve their overall health.

A survey of employers released in March by the consulting firm Towers Watson and the National Business Group on Health found that about 9% expected to use online games in their wellness programs by the end of this year, with another 7% planning to add them in 2013. By the end of next year, 60% said their health initiatives would include online games as well as other types of competitions between business locations or employee groups.

How well do these programs work in practice?  The story reports mixed evidence of the efficacy of the various game-style competitions; this is not too surprising given the complexity of individual incentives within organizations and teams.

Researchers say using videogame-style techniques to motivate people has grounding in psychological studies and behavioral economics. But, they say, the current data backing the effectiveness of workplace “gamification” wellness programs is thin, though companies including WellPoint Inc. and ShapeUp Inc. have early evidence of weight loss and other improvements in some tests.

So far, “there’s not a lot of peer-reviewed evidence that it achieves sustained improvements in health behavior and health outcomes,” says Kevin Volpp, director of the University of Pennsylvania’s Center for Health Incentives and Behavioral Economics.

Moreover, some employees may feel unwanted pressure from colleague-teammates or bosses when workplace competitions become heated, though participation is typically voluntary.

Incentives are powerful; but when and how they matter depends upon institutions.  Gneezy et al have an excellent survey of the literature in the Journal of Economic Perspectives, where they conclude:

When explicit incentives seek to change behavior in areas like education, contributions to public goods, and forming habits, a potential conflict arises between
the direct extrinsic effect of the incentives and how these incentives can crowd out intrinsic motivations in the short run and the long run. In education, such incentives seem to have moderate success when the incentives are well-specifified and well-targeted (“read these books” rather than “read books”), although the jury is still out regarding the long-term success of these incentive programs. In encouraging contributions to public goods, one must be very careful when designing the incentives to prevent adverse changes in social norms, image concerns, or trust. In the emerging literature on the use of incentives for lifestyle changes, large enough incentives clearly work in the short run and even in the middle run, but in the longer run the desired change in habits can again disappear.

HT: Salop.


Fruit trees in a number of cities, including San Francisco, are prevented from bearing fruit in the name of “protecting” pedestrians from slip and falls and keeping away insects and vermin.  In response to these regulations, a group of Guerilla Grafters has emerged to — you guessed it — graft fruit bearing branches onto the non-fruit bearing city trees.

But grafting trees to bear the occasional pear is not all fun and games, apparently.  San Francisco officials consider the renegade arborists to be engaged in a serious offense (San Francisco Examiner):

While the grafters’ activities might seem harmless, Public Works Director Mohammed Nuru said the renegade gardeners are running afoul of the law.

“The trees that are in the right of way, they’re not for grafting,” he said. “The City considers such vandalism a serious offense. There would be fines for damage to city property.”

Nuru had not heard of Guerrilla Grafters, but said he would ask his staff to investigate. Meanwhile, he added, if the grafters have ideas about urban agriculture, they should discuss them with city officials.

NPR embeds one reporter with grafter Tara Hui on a covert grafting operation.  The first thought that crossed my mind as I read the story was skepticism that the costs associated with fallen fruit on city trees could be significant.  The second was hope the story had overestimated the prevalence of this type of regulation.  There is also some interesting law and economics.  The cops and robbers angle in the NPR story with Hui attempting to avoid detection for fear of sanction by the city authorities in the way of fines for vandalism was also interesting.  From the standard Beckerian model of rational criminal behavior we see Hui’s sensitivity to changes in the “price” of engaging in guerilla grafting (that is, the probability of detection weighted by the sanction she will pay if caught) and investments to avoid detection.

But what about the economic benefits?  Here’s Hui’s account:

“If we say where it is, they could come after me,” says Tara Hui, a fruit tree grafter. She’s talking about city officials, who manage the trees and say it’s illegal to have fruit trees on sidewalks.  So let’s just say we’re in some Bay Area city in a working-class neighborhood, at a line of pear trees that bear no pears.

Hui and two assistants pull out a knife, reach into a plastic bag filled with twigs no bigger than your pinkie, and cut from a fruit bearing pear tree. She says it’s an Asian pear, and that she’s grafting it onto a flowering pear tree.  They whittle a wedge into one end of their twig, then cut a groove into a similar-sized twig on the city tree. They join the two, like tongue and groove carpenters. And when their grafted twig eventually grows into a branch.

“There will be a much better looking tree that actually will provide fruit for people that come by,” Hui says.

Hui’s motives to break the law are straightforward.

“We don’t have a supermarket and we have very few produce stores [here],” she says. “What better to alleviate scarcity of healthy produce in an impoverished area than to grow them yourself and to have it available for free.”

For a recent and illuminating paper on the law and economics of criminal behavior which attempts to incorporate conventional critiques of the economic approach — for example, that criminals lack self-control, have non-standard preferences or do not act in their own self-interest — into the standard model, see Murat Mungan’s Law and Economics of Fluctuating Criminal Tendencies.  Mungan’s main goal is to show that the standard economic approach is capable of modification so as to absorb more realistic assumptions and that it gains explanatory power by doing so.

HT goes to Steve Salop for pointing me to the Guerilla Grafter story.

Douglas Ginsburg and I have posted “Free to Err: Behavioral Law and Economics and its Implications for Liberty” on the new and very good Liberty Forum.  Our contribution is based upon a more comprehensive analysis of the implications of behavioral law and economics for both economic welfare and liberty forthcoming in the Northwestern Law Review.   We were fortunate to draw several thoughtful responses to our piece as part of the Forum, and I’ve provided links to those here:

We have have some thoughts to the various responses later, but please do go and read them.

And a reminder to readers interested in the topic more generally that our “Free to Choose” symposium on behavioral law and economics is available here.