NBER WORKING PAPER SERIES
BEHAVIORAL PUBLIC ECONOMICS
B. Douglas Bernheim
Working Paper 24828
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Cambridge, MA 02138
This chapter is forthcoming in B. Douglas Bernheim, Stefano DellaVigna, and David Laibson
(eds.), Handbook of Behavioral Economics, Volume 1, New York: Elsevier. In preparing this
chapter, we have benefitted from the thoughtful and insightful comments we received from a
number of individuals, including Hunt Allcott, Sandro Ambuehl, Stefano DellaVigna, David
Laibson, Benjamin B. Lockwood, and Juan Rios Rivera as well as seminar participants at the
Stanford Institute for Theoretical Economics and UC Berkeley. William Morrison and Josh Kim
have provided excellent research assistance. Taubinsky thanks the Sloan Foundation for support.
The views expressed herein are those of the authors and do not necessarily reflect the views of the
National Bureau of Economic Research.
NBER working papers are circulated for discussion and comment purposes. They have not been
peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies
official NBER publications.
© 2018 by B. Douglas Bernheim and Dmitry Taubinsky. All rights reserved. Short sections of
text, not to exceed two paragraphs, may be quoted without explicit permission provided that full
credit, including © notice, is given to the source.
Behavioral Public Economics
B. Douglas Bernheim and Dmitry Taubinsky
NBER Working Paper No. 24828
JEL No. H0
This chapter surveys work in behavioral public economics, emphasizing the normative
implications of non-standard decision making for the design of welfare-improving and/or optimal
policies. We highlight combinations of theoretical and empirical approaches that together can
produce robust qualitative and quantitative prescriptions for optimal policy under a range of
assumptions concerning consumer behavior. The chapter proceeds in four parts. First, we discuss
the foundations and methods of behavioral welfare economics, focusing on choice-oriented
approaches and the measurement of self-reported well-being. Second, we examine commodity
taxes and related policies: we summarize research on optimal corrective taxes, the efficiency
costs of sales taxes that are not fully salient, the distributional effects of sin taxes, the use of non-
price policies such as nudges, the tax treatment of giving, and luxury taxes. Third, we examine
policies affecting saving, including capital income taxation, commitment opportunities, default
contribution provisions for pension plans, financial education, and mandatory saving programs.
Fourth, we detail the manner in which under-provision of labor supply and misunderstandings of
policy instruments impact optimal labor income taxation and social insurance. We close with
some recommendations for future work in behavioral public economics.
B. Douglas Bernheim
Department of Economics
Stanford, CA 94305-6072
University of California, Berkeley
Department of Economics
530 Evans Hall #3880
Berkeley, CA 94720-3880
The standard economic approach to policy evaluation relies on the assumption of rational �revealed
preferences,� which holds that people always choose what is best for them, that their choices do not
depend on seemingly inconsequential �frames,� and that the preferences revealed by their choices
are transitive and complete. This assumption may seem stringent from a psychological perspective.
Nevertheless, it is at the heart of modern Public Economics because it directly connects theory
and data. Within the rational choice paradigm, economists can often quantify the welfare e�ects
of policies involving commodity taxes, income taxes, unemployment insurance bene�ts, and savings
incentives using only a few measurable, high-level statistics, such as the elasticity of consumption
or labor with respect to the tax rate. In a �eld often concerned with quantitative evaluation of
real-world policies, revealed preferences is a powerful and seemingly crucial identifying assumption.
Even so, the ostensible purpose of many important public policies is to address the concern that
people do not always choose what is best for them, and that the determinants of consumer behavior
extend beyond narrow self-interested optimization. For example, many countries have established
government bureaus that o�er �consumer protection� to guard against the possibility that �rms may
attempt to exploit unsophisticated buyers.1 A number of countries have also created �behavioral
insights� teams, the role of which is to leverage �ndings from psychology and Behavioral Economics
to formulate more e�ective government policies.2 Policy makers often justify otherwise standard
policies such as �sin taxes� on cigarettes, alcohol, sugary drinks, and similar goods on the grounds
that they discourage harmful behaviors. Motivations for consumer-facing energy policy include
the possibility that people may undervalue energy-e�cient goods and overvalue energy-ine�cient
ones due to a �defective telescopic faculty� (Hausman, 1979). Arguments for mandatory retirement
savings programs often reference consumer myopia (Feldstein and Liebman, 2002).
The existence of such policies, combined with a large and growing body of empirical work in Be-
havioral Economics, suggests that the standard approach in Public Economics to policy evaluation
may yield misleading conclusions about the welfare e�ects of some policies, and are simply inappli-
cable to other policies that in�uence behavior through framing e�ects, such as those that determine
salience. The rapidly expanding literature in �Behavioral Public Economics� (henceforth BPE)
combines the methods and insights from Behavioral Economics and Public Economics to extend
the public-economics toolbox, thereby allowing for more robust evaluations of real-world policies,
to develop innovative policy tools, and to explain why consumers' responses to policy incentives are
sometimes anomalous (Chetty, 2015).
This handbook chapter summarizes the emerging �eld of BPE. A comparison with Bernheim
and Rangel (2007), which assessed the state of the nascent �eld roughly a dozen years ago, reveals
that progress has been dramatic. Our focus is on the normative questions that have historically
1Examples include the Consumer Financial Protection Bureau in the U.S., the Federal Ministry of Justice and
Consumer Protection in Germany, the Competition and Consumer Commission in Australia, and the Financial
Conduct Authority in the U.K. See the OECD 2017 report for a summary of over 100 applications of �behavioral
insights� by government bureaus and sectors across the world.
2As of the writing of this chapter, such countries include the U.K., U.S., Australia, and Singapore.
played central roles in the �eld of Public Economics; we are not primarily concerned with research
that only aims to describe the positive e�ects of government policies. There are at least two ways
to organize such a chapter: we could focus on substantive policies, considering relevant behavioral
phenomena in each instance, or on behavioral phenomena, describing the various policy implications
in each instance. Consistent with our substantive focus, we adopt the �rst of these approaches. The
challenge for BPE that we seek to highlight throughout this chapter is the need to maintain the
tight link between empirically measurable statistics and welfare estimates, while moving beyond the
revealed preferences assumption.
The merger of Behavioral Economics and Public Economics has required the formulation and
re�nement of new paradigms for evaluating economic welfare. Accordingly, the chapter begins in
Section 2 with a review of recent developments involving the foundations of Behavioral Welfare
Economics. We distinguish between two main schools of thought, one that employs choice-oriented
methods, another that relies on measures of self-reported well-being. We articulate the foundations
for each approach, explain strategies for implementation, and discuss limitations. Additional topics
include paternalism and alternatives to welfarism.
While Section 2 focuses on foundational conceptual issues such as the nature of economic welfare
and the de�nition of a �mistake,� as well as on classes of empirical strategies for quantifying mistakes,
the next three sections examine concrete aspects of policy design and evaluation, as well as empirical
implementation. The general conceptual framework usefully disciplines the applications, sometimes
in subtle and surprising ways, and it clari�es their interpretation. However, readers whose interests
lie in concrete policy analysis will �nd that it is possible to read Sections 3 through 5 without �rst
absorbing all of Section 2.
In Section 3 we summarize research on policies targeting commodities. We use a simple model
to illustrate how changes in the commodity tax a�ect social welfare when a bias arises either from
consumption �internalities� (i.e., people over-