Friday, 18 April 2008

Behavioural economics and policy

I came across this paper from the New Economics Foundation recently. It's a good run-through of some of the key themes emerging from behavioural economics and how they might be applied in policy. It's also got quite a few useful references that point in some other interessting directions.

For example it led me to this DoH paper on how to encourage healthier behaviour. This coincides with my growing interest in the PruHealth scheme. I know it is private health cover, but I'm intrigued by the idea of incentivising healthier lifestyles. Not only do you get your gym membership discounted, you also get rewarded for healthy eating, having medical check-ups etc. Obviously it enables the Pru to cherry-pick the lowest risk policyholders, but there has to be something in it for them.

Anyway, casting my net wider I also noticed that the recent National Audit Office report on the removal of retail price controls makes an interesting reference to behavioural economics:

Regulators have tended to focus on understanding and regulating the supply side of their markets, making assumptions about the consumer’s response. Until recently, regulators have focussed more on understanding and reforming the industry than on building an understanding of consumers. However, the regulators are now realising that competition and consumer policy are integral to each other and that they need to increase their understanding of how consumers behave. ‘Behavioural’ economics can provide insights into consumer participation in a market which cannot be explained by traditional economic theory, and increasing engagement with consumers and suppliers can improve regulators’ understanding of the market. There is more scope for the regulators to share learning and commission joint projects, for example, on understanding how low income consumers interact with the market.

I think this is exactly the sort of area where behavioural insights could/should be applied. The report shows the significant level of inertia amongst consumers when you open up services that were previously monopolies to competition:

The former incumbents in energy have all lost market share to competitors, although they still retain a large share (46 per cent in gas, and just under 50 per cent in electricity)... BT, the former incumbent, still retains 37 per cent

Finally, the NAO report here on directory enquiries services liberalisation is also worth a read, though it's a bit old now.

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