Behavioral Public Economics: Social Incentives and Social Preferences

219 Pages·2021·13.236 MB·English

by  Shinji Teraji

BEHAVIORAL PUBLIC ECONOMICS
Behavioral Public Economics shows how standard public economics can be improved
using insights from behavioral economics. Public economics typically lists four
market failures that may justify government intervention in markets— imperfect
competition (or natural monopoly), externalities, public goods, and asymmetric
information. Under the rational choice paradigm (‘agents choose what is best
for them’), public economics has examined the welfare effects of policy. Recent
research in behavioral economics highlights a fifth market failure— individuals may
make mistakes in pursuing their own well- being. This book calls for a rethinking
of assumptions of individual behavior and provides a good foundation for public
economic theory.
Key features:
1. Introduces behavioral perspectives into public economics.
2. Explains why economic incentives often undermine social preferences.
3. Reveals that social incentives matter for public policy.
This book will be an invaluable resource for researchers and postgraduate students
in public economics, behavioral economics, and public policy.
Shinji Teraji is Professor of Economics at Yamaguchi University, Japan. His
research is mainly concerned with behavioral economics, institutional economics,
and economic methodology.

BEHAVIORAL PUBLIC
ECONOMICS
Social Incentives and Social
Preferences
Shinji Teraji
First published 2022
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2022 Shinji Teraji
The right of Shinji Teraji to be identified as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
in any form or by any electronic, mechanical, or other means, now known or
hereafter invented, including photocopying and recording, or in any information
storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks,
and are used only for identification and explanation without intent to infringe.
British Library Cataloguing- in- Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging- in- Publication Data
Names: Teraji, Shinji, author.
Title: Behavioral public economics : social incentives
and social preferences / Shinji Teraji.
Description: Milton Park, Abingdon, Oxon; New York, NY: Routledge, 2022. |
Includes bibliographical references and index.
Identifiers: LCCN 2021017264
Subjects: LCSH: Economics–Sociological aspects. |
Economics–Psychological aspects
Classification: LCC HM548.T468 2022 | DDC 306.3–dc23
LC record available at https://lccn.loc.gov/2021017264
ISBN: 9780367362409 (hbk)
ISBN: 9780367362416 (pbk)
ISBN: 9780429344817 (ebk)
DOI: 10.4324/ 9780429344817
Typeset in Bembo
by Newgen Publishing UK
CONTENTS
List of figures vii
Preface ix
1 Introduction: why ‘behavioral’ public economics? 1
1.1 Public economics and policy 1
1.2 Behavioral economics and policy 7
1.3 Why social preferences matter? 14
1.4 From economic incentives to social incentives 20
2 Preferences, utility, and welfare 25
2.1 Preferences and choices 25
2.1.1 Revealed preference theory 25
2.1.2 Critique of revealed preference theory 29
2.1.3 Behavioral economics and revealed preference theory 32
2.2 Utility 35
2.2.1 What is utility? 35
2.2.2 Expected utility theory 38
2.3 Welfare: personal and social 41
2.4 Well- being and happiness 46
3 Economic incentives in public economics 52
3.1 Taxation 52
3.2 Sin taxes 57
3.3 Imperfect information and contracts 62
3.4 Tax compliance 66
3.5 The environment 70
vi Contents
4 Behavioral economics and public policy 77
4.1 Bounded rationality 77
4.1.1 Herbert Simon and bounded rationality 77
4.1.2 Routine 82
4.1.3 Selective rationality and X- efficiency 84
4.1.4 Ecological rationality 85
4.2 Perception and entrepreneurship 88
4.2.1 Uncertainty 88
4.2.2 Schumpeterian entrepreneurship 89
4.2.3 Kirznerian entrepreneurship 90
4.3 Errors and biases 93
4.4 Gains and losses 95
4.5 Nudges 98
4.6 Addiction and self- control 102
5 Social preferences and moral economy 108
5.1 Social incentives and social preferences 108
5.2 Social preferences and fairness 112
5.3 Altruism and envy 115
5.4 Public goods and charitable giving 122
5.5 Philanthropy and corporate social responsibility 125
6 Social incentives and interaction 138
6.1 Society and coordination problems 138
6.2 Social norms 141
6.3 Norm compliance 151
6.4 Identity and culture 161
6.5 Social preferences and internal moral constraints 165
7 Governing the commons with social incentives 171
7.1 The tragedy of the commons 171
7.2 Social preferences and environmental sustainability 173
7.3 Internal moral constraints and environmental sustainability 181
7.4 From Homo economicus to Homo moralis 186
Bibliography 192
Index 202
FIGURES
1.1 Negative externality 5
1.2 Demand curves for light and heavy drinkers 6
5.1 Population dynamics 119
6.1 Payoff matrix 143
6.2 Two utilities 144
6.3 The relationship between b and p 157
6.4 Increase in p 158
6.5 Decrease in p 159
7.1 An equilibrium: 1 – xk and 1 < (1/n )F 177
7.2 No equilibrium: 1 – xk and (1/n )F < 1 178
7.3 An equilibrium: 1 – xk and (1/n )F < 1 178
7.4 An equilibrium: 1 – m – y(k – m) and 1 < (1/n )F 183
7.5 No equilibrium: 1 – m – y(k – m) and (1/n )F < 1 184
7.6 An equilibrium: 1 – m – y(k – m) and (1/n )F < 1 184

PREFACE
In essence, economics is about behavior. Economics has enhanced our understanding
of how people make decisions and behave. Neoclassical economic models appeal
to axioms of rationality in which individuals have stable, consistent, and context-
independent preferences. However, people’s actual choices do not appear to be
explained by neoclassical economic models. People do not come into the world
with immutable preferences, do not always act rationally in the neoclassical eco-
nomic sense, and sometimes cannot handle all the information that comes their way.
Behavioral economics tries to offer a potentially richer set of tools to understand
individual behavior than does neoclassical economic theory. Rather than assuming
that people generally know what is best for them and make decisions consistent
with that knowledge, behavioral economics acknowledges that people often do not
act rationally in the traditional economic sense, make myopic decisions based on
an inadequate understanding of the alternatives, and do not necessarily learn from
their mistakes. Work in behavioral economics suggests that there are systematic
errors that people regularly make because they are ‘human.’ Behavioral economics
has pointed out the limits on human behavior: bounded rationality, bounded will-
power, and bounded self- interest. By assuming a more realistic picture of individual
behavior, behavioral economics makes it possible to alter the design of effective
public policy under conditions of bounded rationality, bounded willpower, and
bounded self- interest.
The aim of this book is to provide an analytical framework for ‘behavioral’ public
economics. Behavioral economics can provide valuable insights on psychological
regularities. These insights can be used to increase effectiveness of interventions in
public policy. Simply not assuming that people are making choices that are in their
own best interests opens up a world of alternative policy interventions beyond just
manipulating prices via taxes and subsidies. Behavioral public economics is the set
of attempts to modify standard public economics so that it is better aligned with