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Time for behavioral political economy? An analysis of articles in behavioral economics

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Abstract

This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program. Such an extension could be related to the concept of robust political economy, according to which the case for paternalism should be subjected to “worst-case” assumptions, such as policymakers being less than fully rational.

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Notes

  1. See Dworkin (2009) for more on paternalism.

  2. For comprehensive presentations of behavioral economics, see Kahneman (2003), Camerer and Loewenstein (2004), Diamond and Vartiainen (2007) and Wilkinson (2007). For an argument in favor of incorporating bounded rationality into economic analysis, see Conlisk (1996).

  3. The study of how cognitive processes and decision-making are carried out in practice is not limited to behavioral economics, narrowly conceived. One could mention groupthink mechanisms (Bénabou 2009; Klein and Stern 2009), institutional and cultural lock-in (Klein 1994; Kuran 1996; Pierson 2004) as well as the use of heuristics (Berg and Gigerenzer 2010; Gigerenzer and Gaissmaier 2011) as three examples of a wider take on how beliefs and decisions are formed. However, it is beyond the scope of this paper to delve deeper into these phenomena.

  4. A positive analysis of how economic decision-making functions does not in itself imply a normative position on whether the government should try to influence economic actors in particular ways. However, it certainly can be used in an argument for paternalism.

  5. Bowles and Gintis (2000: 1425): “First, market failures and state failures are now analyzed in a common framework rather than from competing viewpoints, due to development in information economics, and especially the modeling of relations between principals and agents. Moreover, public choice theory has given us a unified approach covering the actions of government officials and market actors alike. As a result, the state is no longer the exogenous instrument wisely implementing some concept of social well-being, and attention has shifted from picking the right policy, to setting up the right rules so that the imperfect interplay of incentives of all the relevant actors will support socially desirable, if not optimal, outcomes.” Cf. Kliemt (2005).

  6. This is not to say that the exact same assumptions need to be applied: rationality and cognitive ability could be imperfect for both types of actors but the imperfections could be of different kinds.

  7. On how knowledge and rationality are perceived in the Austrian tradition, see Langlois (1985). On the connectedness between public choice and Austrian economics, see Boettke and López (2002).

  8. “Policy” or paternalism need not refer to government interventions but could also refer to market or civil-society actors, who may try to induce others to make better decisions. In this paper, the main focus is on the government, but recommended interventions of the latter type are also covered in the systematic analysis.

  9. The terminology has been criticized by, e.g., Klein (2004) and Mitchell (2004).

  10. Cf. Coase (1994: 116).

  11. Cf. Dufwenberg (2007) and Tasic (2011). On irrational voters, see also Buchanan (1967), Caplan (2007), Wolfers (2007) and Hillman (2010).

  12. This point is also made by Schumpeter (1942/1994: 256–263) and Buchanan and Tullock (1962: ch. 4).

  13. Beaulier and Subrick (2006) use the framework of robust political economy to look at development policy; Voigt (2006) applies it to antitrust policy; and Pennington (2011) uses it to analyze various economic and philosophical issues. On robust institutions more generally, see Levy (2002).

  14. While the conditions are expressed in dichotomous (and categorical-sounding) form in the figure, this is a simplification. They may be met to a smaller or larger degree, and paternalism is called for to the extent that they are met.

  15. However, as pointed out by Sugden (2009), if business owners are to be urged to try to bring about more rationality, one must first analyze if they have an incentive to do this and if they themselves are not characterized by irrationality, cognitive limitations and poor self-control. If so, the case for this type of paternalism is also weakened considerably.

  16. One could also, under this rubric, envisage other methods for solutions than paternalism, e.g., market mechanisms under general institutions that induce economic actors to act almost as if they were rational—see Smith (2000), Levitt and List (2008), List and Millimet (2008) and List (2011). Put shortly, institutions affect how a given level of rationality translates into actions and outcomes.

  17. In the ensuing analysis, we do not consider “the public choice insight”, not because it is unimportant but because we wish to focus on “the behavioral political economy insight”, which applies irrespective of whether policymakers are self-interested or not (von Mises 1966; Krusell et al. 2002). In future research, in accordance with the robust political economy approach, it could be interesting to analyze interaction effects, e.g., to see whether self-interested policymakers exploit cognitive limitations to pursue policies that favor them rather than the population in general.

  18. The full dataset, with a listing of all included articles and with quotes of policy recommendations, is available upon request from the author.

  19. There is considerable overlap between different rankings of economics journals. For example, the one by Kalaitzidakis et al. (2003) has seven of the ten journals included here on its top-ten list (excluding the three finance journals).

  20. By “different” is meant an assumption that specifies policymakers as being rational or, at least, less irrational than those which paternalism is supposed to help make better decisions. One basis for such an argument could be that policymakers are often experts or have access to experts who are able to clearly see what needs to be done. We do not claim that this is an unreasonable assumption—although several scholars cited in Section 3 could be interpreted as seeing it as such—but we do think that it should be made explicitly and that it should be motivated, preferably on empirical grounds.

  21. Of the 323 articles in behavioral economics identified, 131 (40.6%) are purely theoretical. Of the 67 ones that also contain a policy recommendation, 27 (40.3%) are purely theoretical. Hence, a majority of the articles with a policy recommendation contains empirical analysis.

  22. This is not to say that the cognitive limitations are of the exact same kind, only that some type of cognitive limitation is assumed or allowed for also in the case of policymakers.

  23. There is also a small, emerging literature in behavioral political economy outside of the Austrian tradition, exemplified by Krishna and Morgan (2001), Vis and van Kersbergen (2007) and Jeleva and Rossignol (2009).

  24. Some caution when interpreting the findings is advisable: they are only based on publications in ten journals during a ten-year period, and results may differ for other journals and periods. Likewise, classification is to some extent subjective. For transparency and verification, the full classification, of the articles in the top journals and of the articles in Review of Austrian Economics, is available as Excel files.

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Acknowledgments

We wish to thank Christian Bjørnskov, Geoffrey Brennan, Werner Güth, Daniel Hedblom, Arye Hillman, Manfred Holler, Dan Johansson, Henrik Jordahl, Daniel Klein, Mark Pennington, Per Skedinger and two anonymous referees, as well as participants in the conference “Philosophy, Politics and Economics of Public Choice: Reflections on Geoffrey Brennan’s Contributions” at the University of Turku, and participants in the Public Choice Meetings in San Antonio, for insightful comments; Lina Eriksson, Mounir Karadja, Camilla Sandberg and Hans Westerberg for excellent research assistance; and the Swedish Research Council for financial support.

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  1. The Research Institute of Industrial Economics (IFN), P.O. Box 55665, SE-102 15, Stockholm, Sweden

    Niclas Berggren

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Correspondence to Niclas Berggren.

Appendix

Appendix

1.1 How the study was undertaken practically

Each issue of each journal for all 10 years was checked manually in order to find articles that fit the definition of behavioral economics in Section 3. Titles and abstracts were read in order to determine if articles featured behavioral economics content. If an abstract was not available or gave inconclusive information, the introductory and concluding sections were read. Moreover, a full text search query was performed, using a set of keywords (presented below), in order to determine whether or not the article fits our definition of behavioral economics. The searches included all relevant conjugations and modifications of the keywords, e.g., rational, irrational, rationality, irrationality etc. When a keyword was found, the adjacent text was read in order to form an opinion about whether the article could be classified as being in behavioral economics or not.

The introductory and concluding segments of all articles identified as being in behavioral economics articles were then read, and the full articles were furthermore searched with keywords (presented below), in order to see whether they contained a policy recommendation (as defined in Section 3) or not. When a keyword was found, the adjacent text was read in order to form an opinion about whether the article could be classified as containing a policy recommendation or not. Those that were found to contain such a recommendation were further categorized, firstly into categories depending on for whom the recommendation was meant (government or private actors) and secondly into categories depending on whether they employed the same (behavioral economics) assumptions for economic actors and paternalist actors, whether they used different assumptions for these two groups, or if they did not specify anything about the rationality, cognitive limitations or self-control of paternalist actors at all. “The same assumptions” need not mean the exact same assumptions, since there are many different forms of cognitive biases. An article is categorized as making the same assumptions if some kind of cognitive bias is considered in the analysis of both paternalist and economic decision-makers. An article is categorized as making different assumptions if the analysis of paternalist decision-makers proceeds on the assumption that they do not suffer from any cognitive bias or that they suffer from such bias to a lesser degree than economic decision-makers. In the case of our journal of comparison, Review of Austrian Economics, the categorization of articles as being in behavioral economics was conducted in the same manner. However, since none of these articles contained policy recommendations, the further categorization scheme used for the ten other journals was not applied. Instead, an assessment of all articles regarding whether they contained behavioral political economy, i.e., in the sense of explicitly making precise what assumptions are being made of the rationality and cognitive ability of political actors, was made.

Keywords (including names) used for to search all articles in order to be able to classify them as being in behavioral economics or not: Anomaly, Ariely, Behavioral, Bernheim, Bias, Bounded, Bowles, Boyd, Camerer, Cognitive, D03 (the JEL code for behavioral economics), Fehr, Frame, Gintis, Heuristic, Kahneman, Loewenstein, Nudge, Paternalism, Psychology, Rational, Self-control, Thaler, Tversky. Keywords used to search all articles found to be in behavioral economics in order to be able to classify them as containing a policy recommendation or not: Consequence, Implication, Policy, Political, Reform.

Articles incorporating hyperbolic discounting have been included as instances of behavioral economics (although it is disputed whether it signifies irrationality—see, e.g., Dasgupta and Maskin 2005). Articles where policy recommendations are proffered but where it is unclear whether they are directed towards government or civil society have been marked as being directed towards both. Articles where it is unclear or hard to judge whether a policy recommendation is strong or weak, have been categorized as belonging to the latter group.

1.2 Three examples of classification

To illustrate how the classification was made, we briefly describe how three articles that are included in the study were assessed.

  1. 1.

    Eliaz and Spiegler (2006) – article in behavioral economics, no policy recommendation

This paper presents a principal-agent model where agents differ in types. The different types do not depend on heterogeneous preferences, but on the degree of cognitive ability. Cognitive ability is taken to describe the likelihood of agents understanding their future preferences, which in this model are different from current ones. Thus, a higher degree of cognitive ability leads to a greater likelihood of realizing that one has time-inconsistent preferences. Unawareness of time-inconsistent preferences is a typical subject of study in behavioral economics, since current choices often must be based on the estimation of future preferences. If these estimations are faulty, agents are partially or fully naive and therefore subject to cognitive limitations, in this setting leading to a greater risk of being exploited by the principal. This paper does not go further in terms of giving recommendations of how this behavioral feature could be dealt with. Hence it is categorized as being in behavioral economics without a policy recommendation.

  1. 2.

    Ameriks et al. (2003) – article in behavioral economics, policy recommendation, no behavioral analysis of policymakers

This paper analyses the relationship between the propensity to plan and budgeting behavior. Similar households tend to behave differently in terms of how much wealth they accumulate. The authors argue that the reason for this lies in agents’ “attitudes and skills related to financial planning” and that certain attitudes and/or low skills relate to self-control problems for less sophisticated agents. When agents have a hard time committing to (or even making) saving plans that reflect their preferences for consumption today and in the future, they are thought to have some form of cognitive limitation, the reason for which this paper is categorized as being in behavioral economics. The authors also suggest that future research “develop a suitably rich dynamic model of planning and wealth accumulation consistent with our findings. In doing this, it will be crucial to incorporate policy issues.” They also continue with a statement concerning how saving should be encouraged with respect to their findings. The article is categorized as containing a policy recommendation because the authors clearly state that policymakers should try to change agents’ behavior. No further analysis of the policymakers is made, which is why the article is categorized as not containing any behavioral analysis for the envisioned interventionist.

  1. 3.

    Bernheim and Rangel (2004) – article in behavioral economics, policy recommendation, a different behavioral analysis of policymakers (compared to that undertaken for economic actors)

The article is based on the premise that substance addiction is the result of mistakes, an assumption the authors state is motivated by results from previous research in various disciplines. This indicates that agents are assumed to have self-control problems, which is why we characterize the article as being in behavioral economics. The authors also argue that government intervention can help agents with these kinds of self-control problems, and that the type of intervention differs depending on the usage pattern. They then give numerous examples of how policies may be designed under different circumstances. Therefore, the article is categorized as containing a policy recommendation. The authors also conduct a behavioral analysis of the policymakers, when they state that “[t]hough individuals may have some ability to avoid problematic cues and create their own counter-cues, the government is arguably better positioned to do this.” This comment shows that the authors believe that there is a behavioral-ability difference between addicts and policymakers. Thus we characterize this as containing a behavioral analysis of policymakers, but a different one compared to that applied to consumers.

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Berggren, N. Time for behavioral political economy? An analysis of articles in behavioral economics. Rev Austrian Econ 25, 199–221 (2012). https://doi.org/10.1007/s11138-011-0159-z

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