Efficiency Criteria for Nudges and Norms

This article outlines benefit-cost criteria for nudges and behavioral norms for a wide range of policy situations. The principal benefits from well-designed policies usually derive from promoting efficient behaviors, but there also may be counterpart costs generated by discouraging efficient behaviors. The distinguishing economic characteristic of nudges is not only that they are less intrusive interventions that nudge rather than mandate behavior, but that they exploit additional policy dimensions other than financial incentives. Policies utilizing financial incentives have a cost advantage over nudges to the extent that they involve financial transfers, which are not net social costs. Failure to understand this cost distinction has led to overestimation of the cost-effectiveness of nudges compared to financial incentives. Financial incentives are flexible and can be varied continuously on a single dimension. Nudges usually involve indivisible components, but their stringency sometimes can be varied by utilizing nudges on multiple policy dimensions