Nudges Are No Substitutes for Classical Economic Policy Instruments

In which policy areas have nudging methods already been applied?

Nudges have become extremely popular in the last decade. They have been used to contribute to healthier eating diets, improve children’s educational outcomes, reduce emissions, encourage savings behaviour, and so on. For instance, automatic enrolment in retirement savings plans can help younger people save more. Simple but targeted reminder letters sent by health authorities can increase the uptake of healthcare screening programmes. Letting consumers know that they are spending more electricity than their neighbours can substantially change their consumption behaviour.

The Organisation for Economic Co-operation and Development (OECD) has counted over two hundred nudge units that have been set up by local, national and supra-national institutions across the world to design and implement behavioural interventions. Some of the most well-known units are the UK’s Behavioural Insights Team, the BIT, or the World Bank’s Mind, Behavior, and Development (eMBeD), among others.

In your recent meta-analysis you deal with the topic of nudging in the area of tax compliance. What is your main finding?

Nudging practices have also become widespread in taxation. The starting point behind these interventions is the presumption that taxpayers pay their taxes not only because of the fear that they will be punished for not doing so but also because taxpayers like to pay taxes voluntarily for moral reasons. ­Nudges then try to appeal to various moral aspects – such as saying that not paying tax is unfair and reduces the availability of public goods – and social norms – such as saying that almost everyone pays their tax on time – with the aim of increasing voluntary compliance.

Our paper presents a quantitative review, a so called meta-­analysis, of about a thousand treatment effect estimates of nudges obtained from around forty interventions implemented mainly in countries of North and South America and Europe. We find that non-deterrence nudges – i.e. interventions pointing to elements of individual tax morale – are on average ineffective in curbing tax evasion. While we find that deterrence nudges – i.e. interventions emphasising traditional determinants of compliance such as audit probabilities and penalty rates – are ­potent catalysts of compliance, the magnitudes of these effects are very small and they are likely to be bound to the short-run.

Do you think policymakers should abandon the use of ­nudges given your findings?

We claim that nudges do not change the world, at least not the world of taxation. This does not mean that we should abandon all the policy units working hard to come up with new and innovative nudges. Of course, some nudges are more effective than others, but the point is that nudges have very little costs. Sending a message or simplifying a tax form might be an activity worth pursuing if they can help increase compliance even just a little bit.

One has to note, however, that nudges are no substitutes for classical economic policy instruments like taxes, subsidies, and other regulations that aim to change behaviour by altering the underlying economic incentives. Nudging interventions are often fairly easy for policymakers to understand, as opposed to having to dive into more sophisticated and lengthy research-based policy advice, which makes them so attractive. What’s more, implementing nudges is not too costly for poli­ticians and signals to voters that the government is relying on (behavioural) science to improve policy. With that said, nudging policies may crowd-out efforts going into the design of traditional economic policy reforms. In this respect, we see a risk of too much excitement among policymakers around the idea of nudges.