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.