Last updated on June 4, 2015
A fascinating new article in the AJAE by David Just and Andrew Hanks titled “The Hidden Cost of Regulation: Emotional Responses to Command and Control” could have very interesting implications for policy making:
In economic models of behavior, consumers are assumed to value the goods and services they purchase based on stable preferences over externally identifiable attributes such as quality. These models predict that consumers will respond to changes in price in a way that is independent of the source of the price change. Yet research in the behavioral sciences indicates that consumers that are emotionally attached to a consumption good or other behavior might respond with resistance when policies threaten their consumption or behavior. Moreover, policies that in fact validate some emotional attachments can stir a stronger preference for the good or behavior. Reviewing both survey and experimental data from the literature, we demonstrate how such emotional responses can create hidden costs to policy implementation that could not be detected using standard welfare economic techniques. Building upon Rabin’s work on fairness in games, we propose a partial equilibrium model of emotional response to policy whereby preferences are endogenous to policy choices. In accordance with evidence both from our own analysis and the field, we propose that confrontational policies (such as a sin tax) increase the marginal utility for a good, and that validating policies (such as a subsidy) also increases the marginal utility for a good. A social planner that ignores potential emotional responses to policy changes may unwittingly induce significant dead weight loss. Using our model, we propose a feasible method to determine if emotional deadweight costs exist, and to place a lower bound on the size of these costs.
This new paper is theoretical, but while we chatted about our experimental project on price uncertainty last week, David was telling me that when he and his coauthor showed experimental subjects a picture of NYC mayor Michael Bloomberg, who is well-known for his opposition to sweetened beverages, actually caused the same subjects to drink more soda on average than subjects who were not shown the same picture!
In other words, it looks like policies can induce a “Yeah? I’ll show you…” reaction whereby people respond to a ban, a tax, or an effort to curb some behavior by doing more of that behavior rather than less, i.e., by raising the marginal utility of the good banned, taxed, or otherwise regulated. I find it interesting how this is nice evidence in favor of the Lucas critique–has it ever been tested in the lab?– according to which a change in policy induces a change in agents’ preferences, so that it is almost always impossible to predict how people will react to a policy change.