Policy and Choice

Public Finance through the Lens of Behavioral Economics

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Traditional public finance provides a powerful framework for policy analysis, but it relies on a model of human behavior that the new science of behavioral economics increasingly calls into question. In Policy and Choice economists William Congdon, Jeffrey Kling, and Sendhil Mullainathan argue that public finance not only can incorporate many lessons of behavioral economics but also can serve as a solid foundation from which to apply insights from psychology to questions of economic policy.

The authors revisit the core questions of public finance, armed with a richer perspective on human behavior. They do not merely apply findings from psychology to specific economic problems; instead, they explore how psychological factors actually reshape core concepts in public finance such as moral hazard, deadweight loss, and incentives.

Part one sets the stage for integrating behavioral economics into public finance by interpreting the evidence from psychology and developing a framework for applying it to questions in public finance. In part two, the authors apply that framework to specific topics in public finance, including social insurance, externalities and public goods, income support and redistribution, and taxation.

In doing so, the authors build a unified analytical approach that encompasses both traditional policy levers, such as taxes and subsidies, and more psychologically informed instruments. The net result of this innovative approach is a fully behavioral public finance, an integration of psychology and the economics of the public sector that is explicit, systematic, rigorous, and realistic.

Advance Praise for the Book:

"Policy and Choice is a must-read for students of public finance. If you want to learn how the emerging field of behavioral economics can help lead to better policy, there is nothing better."
—N. Gregory Mankiw, Harvard University, former chairman of the President's Council of Economic Advisers, and author of Principles of Economics

"This fantastic volume will become the standard reference for those interested in understanding the impact of behavioral economics on government tax and spending policies. The authors take a stream of research which had highlighted particular 'nudges' and turn it into a comprehensive framework for thinking about policy in a more realistic world where psychology is incorporated into economic decisionmaking. This excellent book will be widely used and cited."
—Jonathan Gruber, Massachusetts Institute of Technology, former Treasury Department official, and author of Public Finance and Public Policy

"The proper design of public policy has never been more important, and it will be shaped by the emerging insights of behavioral economics. Congdon, Kling, and Mullainathan have produced a clear and accessible road map to the key issues."
—Douglas Holtz-Eakin, American Action Forum president and former director of the Congressional Budget Office

"For decades, economists have been advising governments with an impoverished toolkit because they based their advice on a fully rational depiction of human behavior. This book shows the world how much more powerful economic science can be when it is enriched with important insights from psychology. If you are a public finance scholar or practitioner you need to read this book right now; don’t procrastinate!"
—Richard H. Thaler, University of Chicago, coauthor of Nudge

"Congdon, Kling, and Mullainathan have provided a lucid and crisply written primer on how to apply insights from psychology to important issues that arise in public sector economics. This volume will be of interest not only to students in public finance courses, but also to researchers who want to find out what behavioral economics is all about."
—Harvey S. Rosen, Princeton University, former chairman of the President's Council of Economic Advisers, and author of Public Finance