Bittschi, Dwenger, and Rincke (2020) on Nudging Donor Loyalty

Benjamin Bittschi, Nadja Dwenger, Johannes Rincke, “Water the Flowers You Want to Grow? Evidence on Private Recognition and Donor Loyalty.” CESifo Working Paper No. 8424, July 2020. 

• Nonprofit organizations often are heavily reliant on recurring donors; most studies of how to nudge contributions look at one-time, not recurring, donations. 

• Can a nice “thank you” message enhance donor “warm glow,” and motivate donors to continue their support? 

• Germany has a church tax, where church members are assessed a surcharge of 8 percent on their income taxes to finance the church. (In the sample in this article, the amount of the tax averages 478 euro per year, but with significant variance.) 

• The connection to the personal income tax makes the church tax progressive – like the fee structure for American Economic Association members? – and low-income church members pay no church tax.

• The church tax, which is automatically deducted from paychecks, is a default for anyone who is baptized, though individuals can opt out of paying it! Opting out requires “an official declaration made in person at a district court [p. 5].” People who opt out cannot enjoy the full panoply of church-provided services. 

• The authors conduct a large-scale field experiment, n≈198,000, circa 2015. Half the sample receive a letter thanking them for their church tax payments and are told that they are making “an important contribution to our community.” This is termed “a private recognition treatment.” (A postal survey of n≈1,000 provides another source of data.)

• The issue examined is how the receipt of the letter affects opt-out rates in the coming 12 months. 

• The survey suggests that people who receive the thank-you note hold higher opinions of the church and feel more appreciated. (Receipt of the letter does not make people feel better about the government.)

• The thank-you note seemingly does reduce opt-outs over the course of the year, perhaps by as much as 9% -- the “extra” church taxes collected exceed the costs of mailing the letters! The letter seems particularly effective at keeping low-income church members involved. 

• The highest-income people increase their opt-outs, however, immediately after receiving the letter, though over the course of the year, the receipt of the letter doesn’t seem to change opt-out rates of the wealthy.

• The century-plus imposition of church taxes collected by the German state might be doomed, letter or no letter, as people quit church to avoid the tax.

Holz, List, Zentner, Cardoza, and Zentner (2020) on Nudging Tax Compliance

Justin E. Holz, John A. List, Alejandro Zentner, Marvin Cardoza, and Joaquin Zentner, “The $100 Million Nudge: Increasing Tax Compliance of Businesses and the Self-Employed Using a Natural Field Experiment.” NBER Working Paper 27666, August 2020 (pdf here). 

• The tax authorities send you a message… 

• ...maybe the message just happens to mention the upcoming tax filing deadline: the control arm 

• ...maybe the message also notes the potential for your tax evasion to be publicized – one treatment arm, designed to increase the salience of social penalties for being a tax cheat. 

• ...maybe, instead of highlighting the public nature of identified tax evasion, the message notes the potential for your tax evasion to result in imprisonment – another treatment arm, designed to increase the salience of criminal penalties attached to tax evasion. 

• And for each of the three arms noted above, we can take half of the letter recipients and also mention in the letter that the tax authorities are prepared to potentially view mistakes in tax declarations, even honest mistakes, as intentional. (The notion is to frame evasion as a sin of commission, not of omission.) Mistakes imply that you were trying to be a tax cheat! 

• This very natural field experiment is conducted in the Dominican Republic, circa 2019, n≈56,000 firms and n≈28,000 self-employed people; tax evasion reportedly is rife in the Dominican Republic. 

• The field experiment applies to business entities subject to the corporate income tax and to self-employed taxpayers subject to the individual income tax. 

• The various messages are sent shortly before the tax filing deadline. 

• The threat of public disclosure of tax evasion dissuades tax evasion for both firms and individuals. 

• The “prison” message also reduces evasion, and for firms, about twice as effectively as the “publicity” message. 

• Framing evasion as an active choice, a sin of commission, in itself (without publicity or punishment prompts), does nothing (or worse than nothing), and likewise is ineffective if it is paired with the publicity notice. 

• But the combination of “intentional” framing with the prison message doubles the impact of the prison message. 

• The effectiveness of the interventions seems to arise from a decrease (by 20%) in potential taxpayers who declare (falsely, presumably) that their income is below the minimum required for taxation. 

• Large firms drive the reduced tax evasion – there is little or no compliance gain from the smallest 60% of taxpayers.

Goldin and Reck (2018) on Normative Ambiguity

Jacob Goldin and Daniel Reck, “Rationalizations and Mistakes: Optimal Policy with Normative Ambiguity.” American Economic Association Papers and Proceedings 108: 98–102, 2018. 

• Choices often look like they involve frictions, such as a psychic cost associated with considering more options. 

• But though choices look “as if” they are affected by such costs, are the costs themselves “real,” or, to use the authors’ term, “normative”? 

• If the costs are normative, then (all else equal) you want to avoid them, such costs detract from welfare. But if the costs are not normative (that is, if they are “behavioral” in the authors’ terminology) then it would promote welfare to ignore those costs, to willingly incur them by, say, considering more options or requiring active choices – as the costs are not real, no one will end up bearing those costs. 

• Initial health care choices have a tendency to become defaults, and hence have some (undeserved?) staying power. 

• But perhaps it is optimal to stick with even clearly dominated health care plans, because the costs of switching or of just to paying attention to more options are normative and significant. 

• That is, do we really want to encourage people to switch health care plans to ones that are better suited to their health care needs and preferences, given the potential for normative switching costs? 

• Costs of trying to qualify for the Earned Income Tax Credit (EITC): the need to file taxes; record-keeping; mental exertion and attention; increased risk of being audited. 

• Note that most of the costs of establishing EITC eligibility take place in the present, with the benefits delayed. Present biased people will find this temporal distribution of costs and benefits to be unattractive. Should we encourage EITC take-up among present-biased people? 

• Other “mistakes” (or behavioral features) that dissuade applying for the EITC could be procrastination or inattention. 

• Moving to a new residence is costly both financially and otherwise, and again, the costs often are immediate whereas the benefits are delayed. Do people move enough, or do the “not real” but behavioral costs discourage beneficial relocations? Public programs that promote moving will be less valuable to the extent that these costs are normative.

Sunstein (2020), “Behavioral Welfare Economics"

Cass R. Sunstein, “Behavioral Welfare Economics.” Journal of Benefit-Cost Analysis 11(2):196–220, 2020. 

• Economist Douglas Bernheim (2016) lists three premises when discussing individual welfare: (1) a person is the best judge of her wellbeing; (2) judgments are governed by our coherent, stable preferences; and, (3) preferences are what guides our choices. 

• None of these premises is self-evident; indeed, they might all be incorrect. 

• If people lack stable, consistent preferences, or if their choices are skewed by bias, how can we judge how well off they are, how good a job they are doing at serving their own interests? Further, their preferences might be shaped by rules and laws, so crafting rules to promote current interests might be a mistaken (or arbitrary) approach. 

• Behavioral science makes us suspicious of consumer sovereignty, or the claim that people are the preferred judges of their own situation, best positioned to make desirable self-regarding choices. 

• The behavioral evidence rightly undermines our unquestioned respect for consumer sovereignty, but we should be loath to turn it into general disrespect. It might make sense to start with deference to consumer sovereignty, but be willing to look to alternatives if evidence suggests welfare might otherwise be compromised. [Respecting consumer sovereignty as a default...!] 

• A standard description of rationality is that it consists of taking optimal (or, less stringently, reasonable) means of achieving your goals. 

• Nudges or other interventions that are designed to make choices more navigable, to make it easier for people to achieve their goals, are paternalistic with respect to means. 

• Economists generally are not in the business of questioning people’s goals, the ends they have in mind – but Professor Sunstein suggests that there can be strong evidence, in some settings, that (self-regarding) ends should be questioned: “The ends that people choose might make their lives go less well [p. 196].” 

• So, Sunstein starts from a position of alignment with Bernheim, where individual self-regarding choices are respected – but only if those choices are informed and free from behavioral biases. Further, Sunstein will not make a means/ends distinction: the ends could be problematic, just like the means can be. Nonetheless, “means” issues are generally what Behavioral Economics takes on. Tread carefully with “ends” stuff. 

• Bernheim thinks outsiders essentially lack standing to coerce the “direct” choices of others; the outsiders’ preferences are mere opinions and only one opinion, that of the individual involved, counts. Sunstein disagrees. [Benheim refers to choices that matter in themselves as "direct," whereas choices that only matter instrumentally in serving some larger purpose are "indirect."]

• People might be bad at forecasting the welfare they will receive from a choice, and prospective and experienced welfare needn’t match. (We might add retrospective welfare into the confusing mix, too.) 

• The three main contenders for what identifies “welfare” are: (1) preferences; (2) Subjective Well-Being; and (3) (the obtainment of) specified "objective" goods. All of these approaches to welfare are inadequate. 

• There are many circumstances in which people’s choices are wrong, with serious welfare consequences. And what is a direct choice? Perhaps “direct” issues only come in such high levels of abstraction – enjoy a good life – that choice architects in practice are unconstrained by respect for such issues. 

• Given the increased scope for intervention provided by behavioral considerations, how can they be held within reasonable bounds? Guideposts we can use for increasing our respect for individual choices are that the choices be informed, active, free of biases, and the product of a broad perspective.

Beine, Charness, Dupuy, and Joxhe (2020) on Earthquakes and Preferences

Michel Beine, Gary Charness, Arnaud Dupuy, and Majlinda Joxhe, “Shaking Things Up: On the Stability of Risk and Time Preferences.” IZA Discussion Paper No. 13084, March 2020. 

• It seems as if most economists believe that an individual’s risk and time preferences are pretty stable. 

• Patient people and the risk averse would seem to be less likely to migrate, and some empirical evidence supports this view. 

• Albanian per-capita GDP of just over $4000 per year is 30% of the EU average, despite recent high growth in Albania 

• The researchers converge on Tirana, where the currency is the Albanian lek, worth a bit less than one cent. Participants on average get about 12 dollars for a 20-minute or so interview, more than a day’s pay. 

• The 9 enumerators conducting the interactions speak Albanian. Geolocation data for the interviews is automatically collected, with n≈1500. 

• The first choice, aimed at gauging risk preferences: you have 100 coins, each worth 10 lek. You can put some of them in a bag. With probability .5, you will get triple what you put in; with probability .5, you will get nothing. How many coins will you put in the bag? (You keep the coins that you choose not to put in the bag). 

• For time preferences, the question concerns whether you would rather have 1000 lek today or some larger amount of money one month from today. The goal is to see how much more people will have to be paid to induce them to wait one month for their money. 

• The study started on August 31, 2019, and lasted through the end of the year. But on September 21 and November 26, 2019, two major earthquakes hit Tirana. 

• The control group in this (re-imagined post-quake) study is those people whose preferences were tested prior to the first earthquake. The two treatment groups are (1) those who experienced one earthquake, and (2) those who experienced two earthquakes, prior to their testing. 

• “the first earthquake reduces the amount invested in a risky asset (versus a safe asset) by about 25%, while the second one leads to an additional similar effect [p. 3].” Why the big change after the second one, when earthquakes have lost the element of surprise? And why should any changes in risk aversion be reflected in incentivized laboratory games with fixed probabilities? 

• Migration intentions share no connections with risk preferences among the study population, until after the second quake. (But pre-earthquake, already 70% of Albanians intend to migrate.) More exposure to the quakes makes more risk averse people more likely to migrate. More patience also means a lower intention to emigrate. 

• Before the first earthquake, about 42 coins are invested on average in the risk preferences situation: 144 people invest zero, 102 invest all 100 coins. (Aren’t there anti-gambling laws in Albania?) The number of coins risked falls from 42 to 34 to 23 with the earthquakes. 

• Would you take 2590 lek one month from now instead of 1000 lek today? Almost half of the participants would take the immediate 1000 lek. Patience (limited as it is) is cut in half with the first quake, and almost halved again with second. 

• Being exposed to heavier shaking (the geo data proxy for exposure) seems to be connected with a bigger change in risk and time preferences. 

• The earthquakes affect migration intentions indirectly, through their influence on risk and time preferences: the earthquakes mean that the now more risk averse people become willing to emigrate. More impatient people also are more interested in emigration.

Smitizsky, Liu, and Gneezy (2021) on Endowment Effects

Gal Smitizsky, Wendy Liu, and Uri Gneezy, “The Endowment Effect: Loss Aversion or a Buy-Sell Discrepancy?.” Journal of Experimental Psychology: General 150(9): 1890–1900, 2021; https://doi.org/10.1037/xge0000880. 

• The endowment effect, loosely: you value stuff more when you own it than when you don’t. 

• A standard way to “identify” endowment effects is to document a notable difference between the amount someone is willing-to-pay (WTP) to acquire an item and the amount that, if they already have the item, they would need to be paid to relinquish it (willingness-to-accept, WTA). 

• A WTA that is substantially higher than the WTP is evidence for an endowment effect. 

• A prospect theory-style explanation for endowment effects invokes loss aversion. Your reference point changes to include stuff you own, so to depart with owned stuff is coded in the loss domain. 

• An alternative explanation for WTA/WTP gaps is that people bring their buying and selling selves into the lab with them. Strategically, in the real world it often makes sense for buyers to understate their WTP and sellers to overstate their WTA, and maybe those strategies survive in the lab, despite efforts to incentivize truthful responses. 

• The authors invent the “Pay to Keep” condition. [Though for a parallel, see the “retention paradigm” of Gal and Rucker (2018).] There is no selling, only keeping, in this condition. If the amount you are willing-to-pay to keep (PTK) is similar to WTP (and hence typically less than WTA), the “endowment effect” can’t be due to loss aversion: unlike with WTP, the PTK condition involves a loss of something “owned,” but PTK is still below WTA. Any discrepancies (between PTK and WTA, and between WTP and WTA), then, might be consistent with subjects adopting buyer/seller roles. 

• In testing the role of Pay to Keep, those who are offered the opportunity to pay to keep their item must believe that they already “own” the item, that it is part of their endowment. 

• So, the experiments involve three conditions: WTP, WTA, and PTK. Subjects find a nice college-branded pen at their station when they enter the lab. 

• In the WTA and PTK conditions, subjects are told that the pen is theirs, and they should use it to complete some boring task. In the WTP condition, the pen is just near the subject and they are told “no touchies;” they complete the boring task with a pencil instead. 

• After the boring task, WTP folks are asked, want to buy the cool pen (and how much will you pay)? 

• WTA folks are told they could sell their pen (how much would they need to be paid?) or just take it home. 

• PTK folks are told, sadly, pay for the pen or lose it. How much are you willing to pony up? 

• In the experiments, WTP and PTK are similar on average, and much less than WTA. 

• So, there’s an endowment effect (WTA-WTP gap as well as WTA-PTK gap) – but no evidence for loss aversion, as the PTK folks think (?) that the pen is theirs, part of their endowment, even though they have to pay to keep it. 

 • People are not more interested in keeping the pen than in buying the pen: the valuation gaps can be due to buyer/seller discrepancies, though not to loss aversion.

Golman, Gurney, and Loewenstein (2020) on Information Gaps

Russell Golman, Nikolos Gurney, and George Loewenstein, “Information Gaps for Risk and Ambiguity.” Psychological Review 128(1): 86–103, 2021; http://dx.doi.org/10.1037/rev0000252 

• The authors argue that risk and ambiguity aversion arise from the desire to avoid unpleasant thinking about unanswered questions. (Risk and ambiguity loving, alternatively, is associated with the prospect of being spurred to think about pleasant matters.) 

• If you have a question with an unknown answer, you have an information gap. The attention that this gap attracts from you depends on salience (contextual factors which highlight the gap) and importance. 

• Gambling raises the importance of certain information gaps – which team will win? – and hence, directs our attention towards them. We therefore like to gamble when we welcome the increased attention, and are dissuaded from gambling on topics we don’t like to think about. 

• A key information gap concerns uncertain outcomes. Risk aversion (even with minimal stakes) can arise from our desire to avoid thinking about the uncertainty. Compound lotteries, er, compound the uncertainty, and the aversion. 

• The previous two bullet points offer new explanations for (1) betting on your favorite team and (2) low-stakes risk aversion. (A risk averse person presumably would want to bet against their favorite team, as a way of buying insurance against the bad outcome that arises if the preferred team loses.) 

• When shown risky prospects one-at-a-time, people seem to respond similarly to more and less ambiguous situations. When there is a choice between prospects, however, ambiguity aversion emerges. The comparison among alternatives presumably makes the information gaps (not knowing the precise probabilities) more salient. 

• People with relevant expertise enjoy ambiguity, as in racetrack betting. But those who feel uninformed find the ambiguity unsettling. 

• Study 1: Pittsburgh Pirates fans choose how much to bet on either their team’s hits or the number of strikeouts suffered by batters on their team. These bets involve no ambiguity – once the fans choose a bet size, their probability of being assigned the “winning” side of the bet is .5. Nevertheless, the fans bet more when hits are the relevant subject. Presumably they do not enjoy having to think about the strikeouts that the players on their team will suffer. 

• Study 2: Carnegie Mellon University alumni are given the opportunity to bet on the future relative rankings of two excellent CMU computer science departments – or on the relative future prospects of two not-so-good natural science departments. In this case, objective probabilities are not known, there is ambiguity in the prospects. The alumni display aversion to the ambiguity; however, they show a lot less aversion to that ambiguity when betting on the great departments. It seems that thinking about the future success of CMU star departments is a happy thought that they, to some extent, welcome.