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When Do "Nudges" Increase Welfare?

Author

Listed:
  • Hunt Allcott
  • Daniel Cohen
  • William Morrison
  • Dmitry Taubinsky

Abstract

We use public finance sufficient statistic approaches to characterize the welfare effects of "nudges," such as simplified information and warning labels, in markets with taxes and endogenous prices. While many studies focus on average effects, we show that welfare also depends on how the nudge affects the variance of choice distortions, and average effects become irrelevant with zero pass-through or optimal taxes. We implement the framework with experiments evaluating automotive fuel economy labels and sugary drink health labels. Labels decrease purchases of low-fuel economy cars and sugary drinks but may decrease welfare because they increase the variance of choice distortions.

Suggested Citation

  • Hunt Allcott & Daniel Cohen & William Morrison & Dmitry Taubinsky, 2025. "When Do "Nudges" Increase Welfare?," American Economic Review, American Economic Association, vol. 115(5), pages 1555-1596, May.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:5:p:1555-96
    DOI: 10.1257/aer.20231304
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    More about this item

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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