Applying Insights from Behavioral Economics to Policy Design

Abstract

The premise of this article is that an understanding of psychology and other social science disciplines can inform the effectiveness of the economic tools traditionally deployed in carrying out the functions of government, which include remedying market failures, redistributing income, and collecting tax revenue. An understanding of psychology can also lead to the development of different policy tools that better motivate desired behavior change or that are more cost-effective than traditional policy tools. The article outlines a framework for thinking about the psychology of behavior change in the context of market failures. It then describes the research on the effects of a variety of interventions rooted in an understanding of psychology that have policy-relevant applications. The article concludes by discussing how an understanding of psychology can also inform the use and design of traditional policy tools for behavior change, such as financial incentives.