NBER Working Paper Finds Behavioral 'Nudges' Can Match Large-Scale Fiscal Interventions in Cost-Effectiveness
Key Takeaways
- •The researchers compiled over 1,200 estimates from more than 600 studies to compare behavioral nudges with price-based policies across five markets: cigarettes, alcohol, influenza vaccination, electricity, and residential water.
- •Behavioral interventions can match the impact of major fiscal measures, with effects equivalent to an 11% tax in electricity markets and a 100% subsidy for flu vaccinations.
- •Nudges proved more cost-effective than taxes and subsidies in every market examined by the study.
- •The paper demonstrates that nudges generate high welfare returns at the margin, whereas price instruments produce greater total surplus when deployed at large scale.
- •The authors use a behavioral extension of the Marginal Value of Public Funds framework to assess when low-cost nudges can substitute for or complement traditional fiscal measures facing political or budgetary constraints.
A new NBER working paper by John A. List, Matthias Rodemeier, Sutanuka Roy, and Gregory K. Sun examines the economic value of behavioral interventions — commonly known as "nudges" — relative to traditional price-based policy tools such as taxes and subsidies.
Behavioral interventions, rooted in concepts popularized by Richard Thaler and Cass Sunstein's 2008 book "Nudge," have been adopted by governments worldwide, including through dedicated behavioral insights teams in the United Kingdom and United States. Yet despite this widespread policy adoption, their empirical impact remains a subject of debate. Critics often note that the estimated treatment effects of nudges tend to be small in absolute terms. The authors argue, however, that a policy response is only economically meaningful when assessed against the response generated by alternative policy instruments.
To conduct this comparison, the researchers assembled a dataset of more than 1,200 estimates drawn from over 600 studies. The analysis covers five markets: cigarettes, alcohol, influenza vaccination, electricity, and residential water.
By translating nudge effects into equivalent price changes, the authors find that behavioral interventions frequently correspond to what would otherwise be very large fiscal measures. For example, the effect of a nudge in the electricity market is comparable to an 11% tax, while in the market for influenza vaccinations, a nudge's effect is equivalent to a 100% subsidy.
The study also finds that nudges are more cost-effective than price instruments across all five markets examined. However, cost-effectiveness alone does not determine the welfare ranking of policies. Using a behavioral extension of the Marginal Value of Public Funds framework — a standard tool in public economics for evaluating the return on government expenditure — the authors demonstrate that nudges generate high welfare returns at the margin, while price instruments tend to produce larger total surplus when deployed at scale. This distinction is relevant for policymakers weighing when low-cost behavioral interventions can substitute for or complement fiscal measures, particularly where taxes and subsidies face political or budgetary constraints.
The paper is available through the National Bureau of Economic Research.
