What $ Can't Buy

With the rise of behavioural economics, Singapore policymakers are rethinking the use of financial inducements.

In an experiment in Haifa, Israel some years ago, several childcare centres imposed a fine on parents who turned up late to pick up their children. The plan backfired. Instead of fewer late pick-ups, there were more.

And, significantly, when they stopped imposing the fine, the incidence of late pick-ups did not revert to the original level. Why?

The researchers who ran the experiment concluded that by introducing a monetary penalty, the childcare centres replaced social norms with market norms and removed people’s natural feelings of guilt in being late. People’s natural motivations, once undermined, cannot be easily restored.

The experiment is cited by the authors of Freakonomics and there is growing evidence elsewhere in behavioural economics literature that, in certain contexts, paying someone to do something may have the unexpected and unintended effect of reducing effort.

New Perspectives

In the Singapore context, public policies have mainly been shaped by the standard economic theory that assumes human beings are rational.

Because the rational person is assumed to weigh the costs against the benefits of the choices he faces, standard economics says that using price incentives is the most effective way of affecting people’s decisions.

The Singapore government has paid a great deal of attention to getting incentives right. For instance, Singapore embraces (almost unilateral) free trade: there are no tariffs on imports and no subsidies for domestic producers. This ensures that domestic producers have maximum incentives to be as efficient and productive as possible.

With public services such as health care and public housing, the government places a heavy emphasis on co-payment to ensure that users have the incentive to economise and consume these services prudently. By not muting or distorting price signals, and by letting most markets function with minimal state interference, the government promotes the efficient allocation of resources.

However, in future this approach – while still an essential part of the policymaker’s toolkit – will have to be supplemented by new perspectives. Recent debates about organ trading and parenthood policies highlighted the limitations of a purist economics approach. A broader, “context-sensitive” approach will be needed.

This new approach must recognise an individual’s decisions are shaped not just by his cost-benefit calculations, but also by social norms, subtle features of the social context, his cognitive biases and limitations, and even how the decision is presented and framed to him.

Parenthood Policies

For example, in Singapore’s parenthood policies, focusing on incentives may be counter-productive. Instead of providing more financial inducements to couples to have children, the emphasis should be on making quality childcare highly affordable and accessible, promoting work-life balance, and creating a more child-friendly environment.

Of course, many of these efforts will cost money as well. But the point is that the manner in which the state’s financial support is provided, and the way that this support is presented, matters just as much – if not more – than the mere fact of provision.

The lesson of behavioural economics for policymakers is not that the financial incentives or disincentives do not work. It is that in many areas of public policy, context matters.

How is the policy framed and presented? Does the policy work with and support desirable social norms? Does it try to harness people’s motivations to “do the right thing”?

Behavioural economics asks policymakers to consider the different social and psychological factors that might shape a person’s decisions, and then to think much harder about how a policy is designed, implemented and communicated.

Behavioural Economics is included in the Civil Service College’s six-day course, Economics for Policymakers Programme (EPP). The EPP is meant for public officers with little or no background in economics but who require a good understanding of economic principles and how they apply to policy formulation.
    Sep 8, 2010
    Gabriel Wong
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