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.

Cooke, Diop, Fishbane, et al. (2018) on Failure to Appear in Court

Brice Cooke, Binta Zahra Diop, Alissa Fishbane, et al., “Using Behavioral Science to Improve Criminal Justice Outcomes: Preventing Failures to Appear in Court.” ideas42 and the University of Chicago Crime Lab, January 2018 [pdf].

• In NYC in 2014, about 41% of summons to appear in court for minor infractions went unheeded.

• Missed court hearings are costly to the court and to the defendants, who have a warrant issued for their arrest.

• But perhaps behavioral factors, not preferences, are at the root of many missed court dates; maybe people forget, or fail to plan to miss work, or don’t understand the consequences, or just aren’t paying adequate attention. (Court dates can be months after the offense.)

• Perhaps present bias leads to failures-to-appear (FTAs): the benefits of skipping a court date are immediate and the (uncertain) costs are in the possibly distant future.

• “Mental models” (such as the belief that minor offenses do not warrant a court appearance) and perceived social norms (a belief that most people don't show up at court for minor matters) might also lead to FTAs.

• The researchers redesigned the summons form, to: (1) increase the clarity of the message that the form constitutes a summons to court; (2) highlight date, time, location for the court appearance; and to (3) foreground the consequence (an arrest warrant) for failing to appear. 

• The researchers also instituted a series of text message reminders about the court date. Some reminders focus on consequences of a missed court date, and some on planning. The sample size for this intervention is about 20,000. 

• Both interventions are analyzed as randomized trials. 

• The new summons forms reduce FTAs by 13%. 

• The most effective text messages reduce FTAs by 26%; and, when a further text message is sent to those who miss their court dates, the end result is a 32% reduction in warrants issued. 

• The researchers estimate that the two interventions (redesigned form and text reminders), combined, could have reduced FTAs in 2014 by 20,000 to 31,000 or so. 

• Incidentally, text messages are really cheap to send, but most arrestees currently do not provide a cell phone number.

Sunstein (2018) on "Misconceptions About Nudges"

Cass R. Sunstein, “Misconceptions about Nudges.” Journal of Behavioral Economics for Policy 2(1): 61-67, 2018.

• Professor Sunstein examines seven mistaken or misleading – but frequently voiced – complaints about nudges. 

• (1) “Nudges are an insult to human agency” But…compared to what?; how can the provision of information, for example, be such an insult?; try active choosing if defaults make you nervous – but people often prefer a default!

• (2) “Nudges are based on excessive trust in government” But…compared to what?; governments must nudge; nudges, by definition, have low “error” costs; the private sector engages in lots of nefarious nudging; nudges can (and should) be made transparent.

• (3) “Nudges are covert” But…aren’t GPS devices and warning labels transparent?; is this misconception based on concerns about randomized field experiments?; transparency doesn’t seem to undermine the effectiveness of nudges.

• (4) “Nudges are manipulative” But…how is a reminder manipulative?; maybe a graphic warning is a little manipulative, ok?; but in general, manipulation should be made of sterner stuff. 

• (5) “Nudges exploit behavioral biases” But…do GPS and other technologies that improve navigability exploit a bias in a nefarious way?; many nudges counteract behavioral biases, such as inertia; nonetheless, defaults might indeed work because of inertia.

• (6) “Nudges wrongly assume that people are irrational” But…well, let’s say boundedly rational; nudging is inevitable; we needn’t resolve every philosophical issue to make pragmatic progress. 

• (7) “Nudges work only at the margins; they cannot achieve a whole lot” But…millions of additional school meals consumed?; billions in increased savings?; sigh.

Damgaard and Nielsen (2018) on Nudgication

Mette Trier Damgaard and Helena Skyt Nielsen, “Nudging in Education.” IZA DP No. 11454, April 2018.

• Education decisions often involve current costs and greatly delayed benefits. Some decisions are made by “agents” – parents and teachers – on behalf of their “principals,” the students. 

• Many education decisions – such as whether to drop out of school or go to college – are not regular, everyday situations where feedback allows people to adapt to something tolerably optimal over time. 

• Can we be confident that education decisions are well-made? Evidence suggests high returns to more education. The list of potential behavioral biases influencing education decisions is long: self-control shortcomings, limited attention, loss aversion, default effects, social norms, underconfidence… Recall John Stuart Mill: "Those who most need to be made wiser and better, usually desire it least, and if they desired it, would be incapable of finding the way to it by their own lights."

• Perhaps people can be nudged in ways that will improve their choices – and improve them from their own point of view. 

• The targets of nudges can be young scholars, their parents, or their teachers. 

• The authors find 122 studies of field implementations of nudges in education. 

• Opt-in v. opt-out text messages to parents: only 7.8% opt-in, but only 3.5% opt out. Further, outcomes (grades, staying in school) improve with the opt-out default. 

• Framing financial aid as a tuition waiver versus a loan: the waivers steer a lot more law school grads to public interest work. Monetary transfers to families can be framed as being for education, and administered through schools. 

• Mixed results have been reported from framing grades as losses (as in Shrader, Wooten, White, et al., “Improving Student Performance through Loss Aversion”).

• Trying to take advantage of peer group effects is tricky, and sometimes counterproductive. Social comparison nudges can be both informational and motivational – and they can backfire.

• Intermediate assignments and deadlines seem to often raise grades. 

• Self-imposed specific task-based goals also seem helpful, along with reminders of the goal. Unrealistically high goals are demotivating. 

• Reminders to parents about their children’s education often seem helpful, too – likewise with providing informative updates to parents.

• Information provision about the returns to schooling seems to have some purchase in developing countries.

• “Boosting” skills like grit and goal-setting holds some hope for improved educational outcomes.

• Prizes: “The public can encourage the acquisition of those most essential parts of education by giving small premiums, and little badges of distinction, to the children of the common people who excel in them.” (Adam Smith) But the older the children, the less effective the prize nudge, and (like social comparisons), prizes can crowd out internal motivations. 

• Growth mindset and social belonging nudges seem to work OK…

• Nudging will only overcome a binding constraint for a (small?) subset of students. 

•  In general, the long-term effects of nudgication remain unknown.

Sugden v. Sunstein on Nudging, Round 2: Sunstein's Turn

Cass R. Sunstein, “’Better Off, as Judged by Themselves’: A Comment on Evaluating Nudges.” International Review of Economics 65(1): 1-8, March 2018.

[Round 1 here; Round 3 here]

• In trying to improve wellbeing, individuals’ judgments of their own welfare are a central metric. This metric is complicated, however, if people have different judgments before and after a nudge, say. 

• Sugden argues that two potential interpretations of “as judged by themselves” (AJBT) are flawed, one by applying only to relatively rare self-control issues, and the second by allowing individual preferences to be sacrificed to the whims of nudgers. 

• Sugden's title asks if people really want to be nudged towards healthier living. The empirical answer is “yes.” 

• AJBT is not our method to rule out charges of paternalism, but rather, to limit the coercive element of paternalistic acts – like a GPS, we want to improve “navigability,” so people can better serve their own interests. Nudges are about means, not ends. 

• Reminders (such as text messages) serve people’s pre-nudge preferences -- likewise with information provision, as with calorie counts. Other nudges can change behaviors in a manner that the nudged individual endorses after-the-fact, but not before, such as a mechanism to dissuade texting while driving. 

• With self-control problems (akrasia), nudges might help to bolster Dr. Jekyll (planner) at Mr. Hyde’s (doer) expense. Sunstein asked folks online if they had a self-control problem: the majority said yes. And programs to ends addictions are quite popular. 

• Yes, preferences can be formed in the process of elicitation; for instance, people might stick with, and endorse, any of various default settings. Then nudgers are forming preferences, but AJBT limits what nudgers can do. 

• To summarize, some nudges serve ex ante preferences when they increase navigability; some help with (widespread!) self-control shortcomings; and some contribute to preference formation, but in a manner that still respects after-the-fact preferences.

Datta and Mullainathan (2014) on “Behavioral Design”

Saugato Datta and Sendhil Mullainathan, “Behavioral Design: A New Approach to Development Policy.” Review of Income and Wealth 60(1): 7–35, March 2014.

• Behavioral economics can help us design development policies that will work. There are no guarantees, of course – much of what we have learned comes from small-scale field experiments, and their external validity and ability to scale are not yet proven. 

• The poor are like the rest of us, though their poverty adds to their psychological burdens. 

• A farmer’s failure to use fertilizer might not arise from an underlying preference not to use it; indeed, it can happen even where there is a desire to use fertilizer. People procrastinate, and they do so repeatedly; people also lack self-control to resist temptations, including temptations to use resources for things other than fertilizer. As a result, the timely provision of fertilizer at a small subsidy can have significant impacts on usage; likewise, a commitment savings plan can spur fertilizer use. 

• Four types of mental resources are scarce: (1) self-control; (2) attention; (3) cognitive capacity; and (4) understanding. More information or even financial subsidies may not resolve the problems created by these scarce resources. 

• Datta and Mullainathan argue that development problems might be fairly situation-specific, and that the binding constraint or constraints might implicate behavioral issues. (Compare with Dani Rodrik's work (with co-authors) on "growth diagnostics".) Datta and Mullainathan suggest a behavioral mapping of problems that reveals where these constraints (bottlenecks) might bind. Commitment savings accounts, steady income flows, appropriate defaults, reward lotteries, and reminders: these are some strategies that can help to overcome behavioral bottlenecks.