www.ebook3000.com Behavioural Economics and Policy Design Examples from Singapore 8235.9789814366007-tp.indd 9/21/11 2:45 PM This page intentionally left blank www.ebook3000.com Behavioural Economics and Policy Design Examples from Singapore Edited by Donald Low World Scientific 8235.9789814366007-tp.indd 9/21/11 2:45 PM Published by World Scientific Publishing Co Pte Ltd Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-Publication Data Behavioural economics and policy design : examples from Singapore / edited by Donald Low p cm Includes bibliographical references and index ISBN-13: 978-9814366007 ISBN-10: 9814366005 Singapore Economic policy Case studies Economics Psychological aspects-Case studies I Low, Donald, 1973– II Civil Service College, Singapore HC445.8.B45 2011 330.01'9 dc23 2011038079 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Copyright © 2012 by Civil Service College, Singapore All rights reserved This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Civil Service College, Singapore 31 North Buona Vista Road, Singapore 275983 ISBN-13 978-981-4366-00-7 ISBN-10 981-4366-00-5 In-house Editor: Agnes Ng Typeset by Stallion Press Email: enquiries@stallionpress.com Printed in Singapore www.ebook3000.com Agnes - Behavioural Economics.pmd 10/21/2011, 10:53 AM b1231_FM.qxd 9/21/2011 12:52 PM b1231 Page v Behavioural Economics & Policy Design “Academics place much more importance on rigorous logic There is also admiration in the profession for subtle reasoning And mastery of the craft shows itself in the elegance of the intellectual super-structure The practitioner, on the other hand, uses economic theory only to the extent that he finds it useful in comprehending the problem at hand, so that practical courses of action will emerge which can be evaluated not merely in narrow economic cost-benefit terms, but by taking into account a wider range of considerations A practitioner is not judged by the rigour of his logic or by the elegance of his presentation He is judged by results.” Goh Keng Swee "The world is better served by syncretic economists and policymakers who can hold multiple ideas in their heads than by 'one-handed' economists who promote one big idea regardless of context." Dani Rodrik b1231_FM.qxd 9/21/2011 12:52 PM Page vi b1231 Behavioural Economics & Policy Design This page intentionally left blank www.ebook3000.com b1231_FM.qxd 9/21/2011 12:52 PM b1231 Page vii Behavioural Economics & Policy Design FOREWORD Recent events suggest that we are living in an era of increased turbulence Take for example the wide-ranging impacts of the 1998 Asian financial crisis, the terrorist attacks of September 11, the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003 and the 2008/2009 credit crisis The common thread running across each of these crises is that they were all not foreseen sufficiently early Yet it was not the lack of information or the absence of early warning signs that caused governments and businesses to mostly ignore the risks of an impending crisis Indeed, the crises were predictable, or at least, they should have been better anticipated So why weren’t they? The research that has emerged from complex systems suggests that much of our failure to have anticipated these and other lowprobability, high-impact events has to with the way we perceive and analyse the world The standard approaches we use to assess risks are usually based on linear causal relationships, derived from past experience These approaches assume — implicitly — that the world is governed by definite and repeatable cause-and-effect relationships They fail to take into account the external reality of complexity and inherent unpredictability, which suggests that many of the problems we face cannot be reduced to simple and precise cause-and-effect relationships The weather, the economy and the natural world are examples of complex systems Such systems exhibit regularity without being entirely predictable They are capable of producing entirely new and unexpected forms of behaviour In complex systems, the relationship between cause and effect is not as consistent as in the regular, simple systems we are familiar in dealing with vii b1231_FM.qxd 9/21/2011 12:52 PM b1231 viii Page viii Behavioural Economics & Policy Design Foreword At the same time, the research from cognitive psychology and behavioural economics suggests that the standard economic approaches we are familiar with also fail to account for people’s internal limitations in handling probabilities and in managing risk and uncertainty Conventional economics, for instance, starts with the assumption that people are rational agents capable of maximising their interests and of calculating the pros and cons of their decisions in a cool and dispassionate way The reality — as behavioural economists and cognitive psychologists have discovered — is far more complicated In recent years, behavioural economists have begun to apply Plato’s idea that human beings have two distinct decision-making systems When confronted with situations that require us to make decisions in a short span of time, we think in ways that are quite different than if we are given more time to make up our minds We use the Automatic System to deal with matters that require quick decisions The Automatic System, as the name suggests, is intuitive, unconscious (in that we make decisions even without knowing that we are making them), uncontrolled, effortless, habitual, and based on practice skills This is the system of thinking we use in our day-to-day activities and when we have only a short time to make decisions When we have sufficient time for reflection and to process the information presented to us, we rely more on the Reflective System This mode of thinking is controlled, slow, deliberate, conscious and effortful Most of what we are taught in schools, our reasoning and analytical skills, as well as the scientific method, is based on the Reflective System The economics that we were taught in schools and universities is also based on the assumption of rational consumers and firms making decisions using the Reflective System How different are these two systems of thought? Consider and answer this question as quickly as you can: The combined cost of a ball and a bat is $1.10 and the bat costs $1 more than the ball What is the price of the ball? www.ebook3000.com b1231_FM.qxd 9/21/2011 12:52 PM b1231 Page ix Behavioural Economics & Policy Design Foreword ix If you answered ten cents, not be surprised The large majority of people who have taken this test also answered “ten cents” That is the result of the Automatic System It takes a deliberate effort to override this automatic response If you had more time to answer the question, your Reflective System would have arrived at the correct answer of five cents The problem is not that we have two systems of thinking and decision making The problem arises when we rely on one system in situations when we should be using the other system For example, if you are faced with a decision that requires you to assess risks and probabilities — such as which health insurance plan you should purchase — you ought to rely on your Reflective System Relying on your instincts to deal with a problem which you are not familiar and have little prior experience with will probably result in poor decisions There are other occasions when our decisions deviate from what rational choice models in standard economics prescribe A well known finding from behavioural economics is that people value losses more heavily than gains of the same size Thus they value more highly a programme that restores a loss than one which provides them a gain of the same size Similarly, they cite a much higher price to give up something they already possess as compared to the price which they are prepared to pay for exactly the same thing that they not have Why these deviations from standard economics matter for policymakers? There are at least two levels in which policymakers should take the insights of behavioural economics seriously At one level, policymakers should appreciate the various ways in which people make decisions that depart — predictably and regularly — from the strict tenets of rationality Behavioural economists have documented a number of cognitive biases and mental traits that can skew people’s judgements of probability and uncertainty For instance, procrastination, laziness or unfamiliarity with alternatives often lead to people having a strong bias in favour of the status quo in their choice of investment or savings plan Knowing this, social security policymakers should think b1231_Chapter-09.qxd 9/21/2011 b1231 12:51 PM Page 179 Behavioural Economics & Policy Design Behavioural Economics, Policy Analysis and the Design of Regulatory Reform 179 higher increase in rent if he knew that the tenant had taken a job nearby and would therefore be unlikely to move But at the same time, most people felt it was fair for landlords (and others) to pass on cost increases They also felt it was fair for employers to share losses by cutting the wages of their employees, but thought it was very unfair if the firm was still profitable While most of the findings on fairness judgments have come from North America and Europe, there are also now findings from Asia and other areas The striking feature of these disparate studies is the similarity in responses and judgments, suggesting that fairness judgements may well cut across different cultures While fairness motivations and people’s regard for others are not usually considered explicitly in policy decisions, there is now considerable evidence that they influence a wide range of people’s behaviours For instance, sticky wages are a widely observed phenomenon all over the world Not only employees resist wage cuts, there is also wide agreement in society that it is unfair to impose such losses on workers (unless the employer can show that losses are being incurred) The same resistance does not appear to be prompted by cuts to annual bonuses (because these are viewed as foregone gains) This suggests that wage flexibility can be increased by greater use of bonuses as part of workers’ pay packets Countries such as Singapore, where bonuses are a relatively large part of workers’ compensation, thus enjoy a macroeconomic advantage over others that have less flexible wage systems There is also surprisingly consistent regard for fairness in other domains For instance, prices generally reflect changes in costs more closely than shifts in demand, as it is almost unquestionably fair to pass on the higher costs along with a fair profit On the other hand, increasing prices to take advantage of an increase in demand is often regarded as unfair “price gouging” Fairness considerations might therefore act as a constraint that prevents some markets — such as those for resorts in peak holiday periods — from clearing when there are significant increases in demand b1231_Chapter-09.qxd 9/21/2011 b1231 180 12:51 PM Page 180 Behavioural Economics & Policy Design Behavioural Economics and Policy Design Conclusion Although there remains much to be done to apply behavioural findings to the design and implementation of public policies, it is already clear that the quality of debate and decision making in policy design can be significantly enhanced by more attention to these findings Governments would be better placed to set priorities that are in keeping with the preferences of their citizens They would also be able to formulate policies that are more likely to achieve their intended outcomes and attain greater public acceptance Behavioural economics is not a substitute for standard economic analyses, but it appears on present evidence to be a most useful supplement to it — a way of practising better economics and better policy analysis www.ebook3000.com b1231_Chapter-09.qxd 9/21/2011 b1231 12:51 PM Page 181 Behavioural Economics & Policy Design Behavioural Economics, Policy Analysis and the Design of Regulatory Reform 181 References Arkes, Hal and Catherine Blumer (1985) “The Psychology of Sunk Cost.” Organizational Behavior and Human Decision Processes, Vol 35, No 1, pp 124–140 Arrow, Kenneth, Maurine Cropper, George Eads, Robert Hahn, Lester Lave, Roger Noll, Paul Porney, Milton Russell, Richard Schmalensee, V Kerry Smith and Robert Stavins (1996) “Is there a Role for BenefitCost Analysis in Environmental, Health and Safety Regulation?” Science, Vol 272, No 5259, pp 221–222 Chin, Anthony and Jack Knetsch (forthcoming) “The Choice of Measure Matters: Are Many Transport Project Valuations Seriously Biased?” Currie, Graham (2010) “Quick and Effective Solution to Rail Overcrowding: Free ‘Early Bird’ Ticket Experience in Melbourne, Australia.” Transportation Research Record, No 2146, pp 35–42 Diamond, Peter (1996) “Testing the Internal Consistency of Contingent Valuation Surveys.” Journal of Environmental Economics and Management, Vol 30, No 3, pp 337–347 Holmes, Oliver (1897) “The Path of the Law.” The Harvard Law Review, Vol 10, pp 457–478 Horowitz, John and Kenneth McConnell (2002) “A Review of WTA/WTP Studies.” Journal of Environmental Economics and Management, Vol 44, No 3, pp 426–447 Johnson, Eric, John Hershey, Jacqueline Meszaros and Howard Kunreuther (1993) “Framing Probability Distortions, and Insurance Decisions.” Journal of Risk and Uncertainty, Vol 7, No 1, pp 35–51 Kachelmeier, Steven and Mohd Shehata (1992) “Examining Risk Preferences Under High Monetary Incentives: Experimental Evidence from the People’s Republic of China.” American Economic Review, Vol 82, No 5, pp 1120–1141 Kahneman, Daniel, Jack Knetsch and Richard Thaler (1986) “Fairness as a Constraint on Profit Seeking: Entitlements in the Market.” American Economic Review, Vol 76, No 4, pp 728–741 Kahneman, Daniel, Jack Knetsch and Richard Thaler (1990) “Experimental Tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy, Vol 98, No 6, pp 1325–1348 b1231_Chapter-09.qxd 9/21/2011 b1231 182 12:51 PM Page 182 Behavioural Economics & Policy Design Behavioural Economics and Policy Design Knetsch, Jack (1989) “The Endowment Effect and Evidence of Nonreversibile Indifference Curves.” The American Economic Review, Vol 79, No 5, pp 1277–1284 Knetsch, Jack (1990) “Environmental Policy Implications of Disparities Between Willingness to Pay and Compensation Demanded Measures of Values.” Journal of Environmental Economics and Management, Vol 18, No 3, pp 227–237 Knetsch, Jack, Yohanes Eko Riyanto and Zong Jichuan (forthcoming) “The Choice of Measures to Value Increases and Decreases in the Domain of Gains and in the Domain of Losses.” Krupnick, Alan (2007) “Mortality-Risk Valuation and Age: Stated Preference Evidence.” Review of Environmental Economics and Policy, Vol 1, No 2, pp 261–282 Putler, Daniel (1992) “Incorporating Reference Price Effects Into a Theory of Consumer Choice.” Marketing Science, Vol 11, No 3, pp 287–309 Rabin, Matthew (1998) “Psychology and Economics.” Journal of Economic Literature, Vol 36, No 1, pp 11–46 Shampanier, Kristina, Nina Mazar and Dan Ariely (2007) “Zero as a Special Price: The True Value of Free Products.” Marketing Science, Vol 26, pp 742–757 Thaler, Richard (1999) “Mental Accounting Matters.” Journal of Behavioral Decision Making, Vol 12, No 3, pp.183–206 Thaler, Richard and Shlomo Benartzi (2004) “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving.” Journal of Political Economy, Vol 112, No 1, S164–S182 Thaler, Richard and Cass Sunstein (2008) Nudge: Improving Decisions About Health, Wealth and Happiness Yale University Press Tullock, Gordon (1975) “The Transitional Gains Trap.” The Bell Journal of Economics, Vol 6, No 2, pp 671–678 US Environmental Protection Agency (2000) Guidelines for Preparing Economic Analyses Washington D.C Weber, Elke (2004) “Who’s Afraid of a Poor Old Age? Risk Perception in Risk Management Decisions,” in Olivia Mitchell and Stephen Utkus, eds., Pension Design and Structure: New Lessons from Behavioral Finance Oxford University Press Woo, Andrea and Carmen Chai (2011) “Shortage of Donor Kidneys Taxes Health Care.” Vancouver Sun, 21 January, p B3 www.ebook3000.com b1231_Index.qxd 9/28/2011 3:03 PM b1231 Page 183 Behavioural Economics & Policy Design INDEX Abeysinghe, Tilak 106 Additional Registration Fee (ARF) 57, 61 adverse selection 130, 157 affect heuristic 11 Akerlof, George 147 Allcott, Hunt 89, 93 Alm, James 37 ALS, see Area Licensing Scheme anchor/anchoring 12, 163 Ando, Albert 108 annuity payout, see Central Provident Fund Lifelong Income for the Elderly (CPF LIFE) Area Licensing Scheme (ALS) 54–57, 59, 60 car pool 56, 57 fixed fee 60 licence cost/charges 54, 56 power of free 54–57 Restricted Zone (RZ) 54, 55, 56 Ariely, Dan 6, 23, 27, 41, 42 Arkes, Hal 60, 61, 169 Arrow, Kenneth 162 auction/auctions 2, 57–58, 72, 178 experiment on allocation methods 58 see Certificate of Entitlement (COE) see fairness in auctions to allocate COEs 2, 57, 58 Auerbach, Alan 103 automatic stabilisers 102, 104, 105, 118 effectiveness of 104 in Singapore 105, 118 vs discretionary fiscal policy 102–104 availability bias 78, 84, 132, 151 availability heuristic 10, 151 see information bias see saliency Baby Bonus (Singapore), see Children Development Co-Savings Scheme barriers to entry 131 Barro, Robert 108 Bauman, Yoram 35 Bazerman, Max Beaulier, Scott 110 Behbehani, R 54, 56 Benartzi, Shlomo 25, 164 Blanchard, Olivier 103 Blinder, Alan 102 183 b1231_Index.qxd 9/28/2011 3:03 PM b1231 184 Page 184 Behavioural Economics & Policy Design Index Blumer, Catherine 60, 61, 169 bounded rationality 4, 21, 22 bounds on rational thought 24 unbounded rationality of economic agents bounded self-control 21, 24, 106, 108 lack of self-control 25, 107, 119 limited self-control or willpower bounded self-interest 21 self-interest bounded bounded selfishness 24, 25 bounded willpower willpower bounded see bounded self-control Burtless, Gary 104 Camerer, Colin 23 cap-and-trade 2, 71–72 Caplan, Bryan 110 car pool, see Area Licensing Scheme car/vehicle ownership 2, 46, 53, 60, 61, 66, 72 ownership control 62 ownership cost vs usage charges 61, 62 vehicle population growth 57 Certificates of Entitlement (COE) 2, 57–59, 62, 72 Central Provident Fund (CPF) 107, 122, 134, 136, 147–150, 152–158, 165, 166 contribution rate 149 CPF Board 147, 155, 157 pension fund 148 see Medisave, MediShield and ElderShield withdrawal policy 149, 157 Central Provident Fund Lifelong Income for the Elderly (CPF LIFE) 12, 30, 152, 155–158 annuity payout 151, 153, 154, 155, 157 beneficiaries 150, 153, 156, 165, 166 bequest amount/value 154, 155, 156 national annuity scheme 12, 147, 148, 150, 165 national longevity insurance scheme 30, 150 National Longevity Insurance Committee (NLIC) 150, 151, 152, 153, 154, 155, 157 premiums 153, 157 Chai, Carmen 161 Chambers, Valrie 116 cherry picking 130, 137 Children Development CoSavings Scheme 43 Chin, Anthony 60, 162 Choices and information overload 96 and making better decisions 9–10, 29–30 and the role of government/public policy 11, 29 better health choices 137 influencing consumer’s behaviour 93 www.ebook3000.com b1231_Index.qxd 9/28/2011 3:03 PM b1231 Page 185 Behavioural Economics & Policy Design Index simplifying choice 155 under conditions of uncertainty vs predicted by the rational choice model 22 choice architecture 29 Choy Keen Meng 106 Cialdini, Robert 94 cognitive biases 5, 8, 10–11, 21, 32, 119, 144 biases of policymakers and regulators 10–11 biased guidance 174 see affect heuristic see anchoring see availability bias see discounting see endowment effect see framing see loss aversion see mental accounting see present-biased preferences see saliency see self-serving biases see status quo bias collective action 27, 36, 37, 39–40 competition 12, 21, 47, 83, 87–89, 96, 97 in electricity industry/retail 12, 87–89 see status competition congestion 2, 12, 46, 53, 54, 57, 60, 61, 62, 66, 167, 168, 169, 177 charging/charges 46, 53, 54, 56, 57, 59–63, 66, 167–169, 177 congestion-induced delay 168 185 management policies 54 see Area Licensing Scheme (ALS); Electronic Road Pricing (ERP); and Vehicle Quota System (VQS) cost-benefit analysis 20, 23, 30, 40, 55, 77, 153 cost-benefit calculation/s 3, 4, 6, 136 counter-cyclical fiscal policy, see discretionary fiscal policy and/or automatic stabilisers CPF, see Central Provident Fund CPF LIFE, see Central Provident Fund Lifelong Income for the Elderly crowd in 44, 45, 48 crowding out/crowd out 37, 41, 43, 142 social norms 37 lower-income patients 142 Currie, Graham 170 Darby, Sarah 96 default/defaults 4, 7, 9, 29, 31, 79, 89, 136, 137, 138, 140–141, 154, 155, 162, 171, 172 see opt-out result of default rule in insurance options 172 use of defaults in organ donations 29, 140–141 use of defaults in MediShield 29, 136 Diamond, Peter 162 discounting, see hyperbolic discounting discretionary fiscal policy/ measures 102–105, 107 b1231_Index.qxd 9/28/2011 3:03 PM b1231 186 Page 186 Behavioural Economics & Policy Design Index asymmetry in 103 discretionary fiscal transfers/ discretionary transfers 12, 103, 105, 107–111, 113–119, 122, 168, 176 effectiveness 103, 105–106, 112 implementing/ implementation 102–103 known as “special transfers”, see special transfers vs automatic stabilisers 102, 104, 105, 118 Dubner, Stephen 2, 127 earmarking 80, 176 economic rationalism 1–3 pragmatic rationalism 11 Economic Restructuring Shares (ERS) 112, 116, 117, 124 economies of scale 21, 72, 157 ElderShield 134, 135, 136 electricity market/industry (Singapore) 87–89 liberalised/privatised 87, 88 Electronic Road Pricing (ERP) 54, 59–64 gantry 63 In-vehicle Unit 60, 63 pay-as-you-use principle 60 EMA, see Energy Market Authority endowment effect 22–23, 26, 29, 89, 136 experiments with mugs and chocolate 23, 171 study on basketball tickets 23 Energy Market Authority (EMA) 87, 88, 89, 90, 95, 97 Entitlement, see feelings of entitlement Environment carbon emissions 69, 71, 84 carbon tax/taxes 47, 71 energy efficiency 47, 81, 82, 88, 89, 93, 96, 97 environmentally friendly 12, 69, 73, 74, 76, 84 environmental protection 36, 173 environmental sustainability 8, 47, 70, 84 global warming 71 pollution 69, 70, 71, 72, 78, 84, 168, 169, 174, 175 recycling 8, 47, 73, 76, 77, 84 ERP, see Electronic Road Pricing ERS, see Economic Restructuring Shares externalities 36, 45–47, 69, 70–72, 84 negative 45, 70, 72, 84 positive 47, 70, 84 social costs 70 fairness 5, 26, 30, 46, 48, 57–58, 142, 143, 163, 178–179 and wage cuts 179 for organ donor 30–31 in auctions 57, 178 ultimatum game 26 feelings of entitlement 110, 119, 174–176 Feldstein, Martin 102 fertility rates 17, 43–45 maternity benefits 17, 19 www.ebook3000.com b1231_Index.qxd 9/28/2011 3:03 PM b1231 Page 187 Behavioural Economics & Policy Design Index financial crisis 102, 113 Resilience Package (in Singapore) 113, 114 2008/2009 stimulus packages (in Singapore) 105 framing 12, 22, 27, 30, 31, 44, 93, 95, 112–113, 119, 147, 152, 165, 168, 169 and logics of appropriateness 27, 30 framing effects in the analysis of tax expenditure 27 Frank, Robert 83 Free 19, 27, 54–57, 130, 170, 174 choice-of-chocolate experiment (Lindt truffle vs Hershey’s Kiss) 54–55, 170 power of free 54–57, 170 roads 57 see zero price effect use of public transit systems/ free rides 56, 170 Frey, Bruno 48 Friedman, Milton 103, 108 Geltz, Christine 96 Gneezy, Uri 42 Goldstein, Daniel 140, 141 Goods and Services Tax (GST) 3, 103, 111, 112, 113, 114, 115, 116, 117, 118, 124, 125 GST Credits 3, 112, 113, 114, 115, 125 Offset Package 116–117, 124, 125 Growth Dividends 112, 113, 116, 124 GST, see Goods and Services Tax 187 habits 8, 78, 94, 138, 139 driving habits 8, 78 see smoking healthcare 2, 3, 12, 19, 44, 46, 106, 108, 127–135, 137, 138, 142, 143, 144, 176 and co-payment 2, 138 costs 128, 129, 138, 143 financing 127, 133–134, 137 market failure/s 128–129, 131, 133 reforms 127 see insurance and insurance schemes subsidy 142 Heffner, Reid 74 Heinrich, Joseph 26 herd phenomenon 94 Holmes, Oliver 164 Horowitz, John 171 HOTA, see Human Organ Transplant Act Hu, Richard 110 Human Organ Transplant Act (HOTA) 29, 141, 142 hyperbolic discounting 25, 29, 81, 110, 133, 138 discount rates 25, 81–82, 133, 134 see discounting hypothecation, see earmarking image motivation/s 70, 73, 84 see reputational value incentives adverse incentive effects 20 affecting people’s decisions erode/weaken 19, 110 b1231_Index.qxd 9/28/2011 3:03 PM b1231 188 Page 188 Behavioural Economics & Policy Design Index for desired behaviour 17 misalignment of 70 see social norms and economic incentives see social norms vs market norms/incentives unintended 169 vs regulations 40, 45, 72 inequality 46, 83 see social equity inertia 29, 133, 148, 154 informational asymmetries 130, 133 see adverse selection see moral hazard insurance 4, 9, 29, 30, 44, 102, 104, 127, 129, 130, 132, 133, 134, 135, 136, 137, 144, 149, 150, 152, 172 failure of private health insurance markets 130 company/companies 129, 130 premium 130, 136, 137, 150, 153, 154, 155, 157, 170 see insurance schemes unemployment insurance 44, 102, 104 insurance schemes health insurance scheme for catastrophic illness, see MediShield long-term care insurance scheme, see ElderShield national longevity insurance scheme, see CPF LIFE social insurance scheme 135 intrinsic value 37 Johnson, Eric 140, 141, 172 Kachelmeier, Steven 163 Kahneman, Daniel 6, 22, 23, 57, 58, 75, 91, 111, 131, 143, 151, 153, 163, 171, 178 Keeler, James 116 Khaw, Boon Wan 30, 31 Knetsch, Jack 161, 162, 171, 174, 178 Krupnick, Alan 173 Landsberger, Michael 116 Land Transport Authority (LTA) 59, 61, 62, 63, 64 Layard, Richard 83 Lee, Hsien Loong 19, 101, 150 Lessig, Lawrence 39 Levitt, Steven 2, 127 libertarian paternalism Liebman, Jeffrey 128, 131, 132 life-cycle hypothesis 24, 25, 107 Loewenstein, George 132, 139 logics of consequences vs logics of appropriateness 27 loss aversion/loss averse 4, 7, 22–25, 29, 44, 69, 70, 75, 77–78, 84, 90–92, 113, 137, 152, 153, 165, 171, 177 disparity between gains and losses 171 explanation for people’s preference for mitigation remedies over compensation 177 Lovins, Amory 93 LTA, see Land Transport Authority Lucas Critique 103 www.ebook3000.com b1231_Index.qxd 9/28/2011 3:03 PM b1231 Page 189 Behavioural Economics & Policy Design Index Lucas, Robert Jr Lunn, Pete 103 Malhotra, Deepak marginal propensity to consume 115 market failure/s see adverse selection see externalities see healthcare market failure see moral hazard see tragedy of the commons Martinez, Mark 96 McConnell, Kenneth 171 means testing 142–143 vs universal subsidies 142 Medifund 134 Medisave 107, 122, 123, 134–137 top-ups to 107, 123 MediShield 29, 134, 135–137 coverage of 136 premiums 136, 137 Menon, A P G 60 mental accounting 12, 23, 62–64, 70, 79, 84, 115–116, 119, 166–168 and decoupling 167–168 and loss aversion 23 see Personal Savings Calculator (Adelaide) see windfall gain Modigliani, Franco 108 moral hazard 2, 20, 110, 130, 135 Mullainathan, Sendhil 4, 24, 25, 26, 89, 93 multiplier effect 115 expenditure multiplier (Singapore) 106 189 New Singapore Shares (NSS) 109, 112, 123, 124 Olson, Mancur 27 opportunity costs 109, 131 opt-in/opt in 141, 161, 163 see default/defaults opt-out/opt out 7, 9, 29, 136, 137, 141, 161 of participation in organ donations 141 opt-out vs opt-in 141, 161, 163 see default/defaults organ donation/s 29, 30, 36, 43, 140–141, 161 Human Organ Transplant Act, (HOTA) 22, 141, 142 Human Organ Transplant (Amendment) Bill 31 Patt, Anthony 10 pension/pensions 44, 104, 148, 164 pension fund 148 permanent income hypothesis 108 Perotti, Roberto 103 Personal Savings Calculator (Adelaide) 64–65 Pickett, Kate 84 Posner, Eric 37 present-biased preferences 109, 132, 138, 139, 140 prisoner’s dilemma 39 private transport privatisation 46, 47 of schools, healthcare and social housing 46 b1231_Index.qxd 9/28/2011 3:03 PM b1231 190 Page 190 Behavioural Economics & Policy Design Index privatised (electricity industry) 87 procrastination 24, 89, 133, 134, 148 Progress Package 112, 124 prospect theory 22, 75 see loss aversion see endowment effect public transport 8, 9, 21, 54, 63–66, 177 Putler, Daniel 171 Rabin, Matthew 171 rational choice model 17, 18, 20, 21, 22, 31, 128, 135 logics of consequences 27 rational choice theory 40 rebates 73, 76, 80, 81, 91, 92, 108, 110, 113, 114, 115, 119, 122 repugnance/repugnant 26, 30, 43 sale of organs 43 see social norms selling and buying of organs 30 reputational value 37 retirement savings 4, 148, 150, 153, 164–166 save-as-you-earn programmes 25 Save More Tomorrow scheme/Save More Tomorrow Programme 25, 165 see Central Provident Fund Ricardian equivalence 108 risk 6, 10, 29, 39, 42, 96, 114, 128, 130, 131, 133, 134, 137, 150, 153, 154, 157, 168, 173 of damage to valuable social norms 43 of “information overload” 96 pool/pooling 130, 131, 133, 134, 137, 149, 150, 157 profile 137 Special Risk-Sharing Initiative 114 risk-averse 39 road pricing 2, 54, 55, 56, 59 see Electronic Road Pricing (ERP) road usage 17, 19, 56, 66 Rodrik, Dani 26 Roth, Alvin 26, 30, 43 Ruderman, Henry 82 Rustichini, Aldo 42 saliency/salient 10, 29, 30, 62–64, 66, 70, 78, 79, 88, 93–94, 97, 114, 132, 138, 139, 153, 155–156, 168 and social norms 93 increasing energy through efficiency 93 making ERP charges more salient 62–63 making the savings from switching to public transport more salient 64 see availability bias see framing savings 4, 24, 25, 43, 63–66, 72, 81, 82, 90, 91, 96, 103, 106, 107, 108, 109, 110, 113, 115, 119, 122, 127, 132, 134–135, 144, 147–150, 153–155, 164–166, 176 www.ebook3000.com b1231_Index.qxd 9/28/2011 3:03 PM b1231 Page 191 Behavioural Economics & Policy Design Index compulsory employee savings, see Central Provident Fund (CPF) Edusave 107 energy savings 82 for healthcare 127 from switching to public transport 64 in electricity bills 81 Post Secondary Education Account 123 see Children Development Co-Savings Scheme (Baby Bonus) see Medisave see retirement savings Schwartz, Barry Seinfeld, Jerry self-image 37, 69, 74, 75 self-serving biases 163 sense of entitlement 110, 119 Service and Conservancy Charges (S&CC) 108, 110, 113, 122 Shampanier, Kristina 54, 170 Shapiro, Matthew 116 Shefrin, Hersh 25 Shehata, Mohd 163 Shiller, Robert 147 Simon, Herbert 6, 22, 24 Slemrod, Joel 116 Slovic, Paul 11 smart grid 88 Intelligent Energy System (Singapore) 96–97 smoking 5, 38, 132, 138–139 anti-smoking measures 138 tobacco duties 38, 46, 139 social equity 3, 58, 59 191 social expenditure see discretionary fiscal transfers/discretionary transfers and special transfers social spending (in Singapore) 106–107 social transfers 46, 106 social norms and economic incentives 8, 12, 36, 38–40, 47–48 as “psychological” taxes (in the form of shame or social disapprobation) 36 as subsidies (in the form of social approval) 36 collective action problem, see collective action and tragedy of the commons governments play a large part in shaping 39 increasing energy efficiency through 93 see repugnance/repugnant vs market norms/incentives, see crowd in and crowd out social security 104, 122, 134, 147–149, 158 CPF vs social security systems in other developed countries 148 social security reforms 148, 149 Solof, Mark 53 special transfers 103, 110, 176 b1231_Index.qxd 9/28/2011 3:03 PM b1231 192 Page 192 Behavioural Economics & Policy Design Index see discretionary fiscal transfers/discretionary transfers Spencer, Marilyn 116 status competition 83 status quo bias 4, 7, 11, 24, 29, 31, 89, 90, 136 see defaults see loss aversion to want to preserve the status quo 113 Subramanian, Arvind 26 subsidies 2, 35, 36, 46, 47, 106, 127, 131, 142, 143 “psychological” subsidies (social approval) 36 sunk cost effect 60, 62, 168 sunk costs 59, 60, 61, 131, 163, 168, 169 see barriers to entry Sunstein, Cass 6, 9, 29, 37, 38, 94, 111, 164 surplus sharing 107, 109, 110, 122, 176 Tan, Ling Hui 59 Tasic, Slavisa 10 tax/taxes 2, 3, 17, 19, 27–28, 36, 37, 45–47, 53, 54, 57, 61, 64, 71–73, 80, 84, 93, 101–106, 108, 110, 112–113, 115–116, 118, 124, 129, 166, 167, 169, 177 ad valorem 57 breaks vs cash grants 28 carbon 47, 71 compliance 37 cuts are framed as a “bonus” 112–113 energy 93 income 17, 46, 110, 118 “psychological” (in the form of shame or social disapprobation) 36 reduced vehicles taxes and shifted towards usage charges 61 see Goods and Services Tax (GST) taxation to force smokers to internalise the social cost 139 vehicle 53, 54, 56, 57, 61 Thaler, Richard 4, 6, 9, 23–26, 29, 62, 94, 110, 111, 115, 164, 166, 167, 168 Titmuss, Richard 41 tragedy of the commons 25, 36, 71 Tullock, Gordon 174 Tversky, Amos 6, 22–23, 75, 111, 151, 153 unemployment insurance, see insurance Van den Noord, Paul 104 Vehicle Quota System (VQS) 54, 57, 59, 72 see Certificate of Entitlement (COE) see auction/auctions VQS, see Vehicle Quota System wage supplementation for low-wage workers 20, 46, 106 www.ebook3000.com b1231_Index.qxd 9/28/2011 3:03 PM b1231 Page 193 Behavioural Economics & Policy Design Index Earned Income Tax Credit, United States 106 see Workfare Income Supplement (WIS), Singapore Working Tax Credit, United Kingdom 75, 88, 106 Weber, Elke 161 Wilkinson, Richard 84 willingness to accept (WTA) 23, 77–78, 173–174 willingness to pay (WTP) 23, 77, 172–174 193 choice of measure (WTP vs WTA) 172–174 windfall gain 106, 115–116, 118, 166 Woo, Andrea 161 Workfare Income Supplement (WIS), Singapore 46, 106 Zeckhauser, Richard 10, 128, 131, 132 Zelinsky, Edward 27 zero-price effect 55 see free ... & Policy Design Behavioural Economics and Policy Design policymakers the prospect of improving policy design and, thereby, policy outcomes So what insight does behavioural economics offer policymakers?.. .Behavioural Economics and Policy Design Examples from Singapore 8235.9789814366007-tp.indd 9/21/11 2:45 PM This page intentionally left blank www.ebook3000.com Behavioural Economics and Policy. .. can improve policy design and achieve better outcomes b1231_Introduction.qxd 9/21/2011 b1231 12:53 PM Page Behavioural Economics & Policy Design Behavioural Economics and Policy Design In a