20th November – ‘Nudge’ in public policy

Nudge – A desirable public policy tool

This is a classic example of businesses using behavioural foibles to upsell products to customers. There is now a school of thought that the understanding of human behaviour can be used by policymakers to nudge citizens to act in a way that is good for them or for the country at large.

The Economic Survey of 2018-19 had an entire chapter devoted to leveraging the behavioural economics concept of ‘Nudge’ in public policy. ‘Nudge Units’ now exist in many countries including Germany, the UK and Japan to help make policies that use this theory.

What is ‘nudge’ in public policy?

  • The ‘Nudge’ theory is predicated on the assumption that the decisions we make in everyday life are not completely rational and influenced by behavioural biases. The supporters of this theory think that the way to make people make the right choice is to identify the psychological factors that lead to those choices and use behavioural interventions or ‘nudges’ to lead to better decision-making.
  • The theory was popularised by Richard Thaler and Cass Sunstein in the book, Nudge: Improving Decisions about Health, Wealth and Happiness. They define it as “any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives.”
  • The key here is that the citizens are not forced into any option and that they have the entire array of choices open to them. Small tweaks are done to gently push them towards a more desirable alternative.

Influencing public decisions –

There are many ways in which individuals can be made to act in a way that is good for themselves and the society.

  • The first is plain campaigning, where the citizens are free to choose any option.
  • The second is ‘nudge’, where behavioural economic inputs are used to make one choice appear better than others.
  • The third is giving economic incentives to lead to one particular choice.
  • And the fourth is setting up laws to prohibit certain choices.

A combination of nudge, incentives and mandate has been used by the policymakers so far in India. Swacch Bharat Mission, GiveItUp campaign for gas cylinder subsidy, and Beti Bachao Beti Padhao are some of the campaigns where nudge has been used successfully in recent years. But simply using ‘nudge’ does not always give the desired result, so it is combined with incentives (income tax breaks for 80C investments) and, at times, prohibitive laws (alchohol ban in some States).

Recent examples –

  • A combination of ‘nudge’ with incentives is seen in recent rounds of Covid-related stimulus too. The most obvious example is the LTC cash voucher scheme. The LTC money spent on domestic travel is tax-exempt if some conditions are fulfilled. But since most did not travel during the pandemic, this tax benefit could not be claimed. The Centre has said that instead of one LTC amount, Central Government employees will be given tax benefit on the leave encashment amount, and the travel fare, if the taxpayer purchases goods and services worth three times the travel fare and one time the leave encashment. The goods and services should attract GST of 12 per cent or more, should be bought from a GST registered vendor and paid through digital mode.
  • So here the Centre is using the loss-aversion biasthe taxpayer loses the tax benefit if he has not travelled during the pandemic — to nudge people to buy goods thus spurring demand, giving revenue to the government and nudging people towards digital payments. The taxpayer, of course, has the option of not buying the goods or services and foregoing the tax break, if he so wish.

Way forward –

The government could use the insights it has on public behaviour to implement policies that may not be in the best interest of citizens. The government should ensure that such practices do not creep into public policies’ use of ‘nudges.’ It can be avoided by –

  • the government being transparent about its intent and informing the people about the way in which their choices are being shaped. This should be done even though it may make the implementation less effective; and
  • persuading citizens through rational means (with campaigns, awareness drives, etc) should be the preferred course of action as only such methods respect the freedom of the individual.

SourceThe Hindu Business Line

QUESTION – What is ‘nudging’ in public policy? Discuss India’s recent tryst with nudging in successfully achieving a feat in public policy implementation.

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