Tuesday, November 24, 2015

Alcott and Kessler on behavior and welfare changes from 'nudges"

An NBER working paper:

The Welfare Effects of Nudges: A Case Study of Energy Use Social Comparisons
Hunt Allcott, Judd B. Kessler
NBER Working Paper No. 21671
Issued in October 2015

"Nudge"-style interventions are typically evaluated on the basis of their effects on behavior, not social welfare. We use a field experiment to measure the welfare effects of one especially policy-relevant intervention, home energy conservation reports. We measure consumer welfare by sending introductory reports and using an incentive-compatible multiple price list to determine willingness-to-pay to continue the program. We combine this with estimates of implementation costs and externality reductions to carry out a comprehensive welfare evaluation. We find that this nudge increases social welfare, although traditional program evaluation approaches overstate welfare gains by a factor of five. To exploit significant individual-level heterogeneity in welfare gains, we develop a simple machine learning algorithm to optimally target the nudge; this would more than double the welfare gains. Our results highlight that nudges, even those that are highly effective at changing behavior, need to be evaluated based on their welfare implications.

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