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Opportunity cost neglect in public policy

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  • Persson, Emil
  • Tinghög, Gustav

Abstract

Opportunity cost is the foregone benefit of options not chosen. If opportunity costs are neglected in decisions about public policy, there is a high risk that the best options are overlooked. We study opportunity cost neglect in public policy in experiments with members of the general public in Sweden and international experts on priority setting in health care (n = 957). We find strong evidence of opportunity cost neglect in public policy, where participants who acted in the role of policy makers were between six and ten percentage points less likely to invest in a public health program when reminded about opportunity costs (money could fund other health programs). To our surprise, we failed to confirm an effect consistent with opportunity cost neglect in private consumption; but exploratory analyses revealed a substantial age effect that reconciles our findings with previous literature. Young participants showed opportunity cost neglect, while the effect was reversed for old participants. The implications of opportunity cost neglect for public policy are substantial, including misallocation of public resources and an artificially high demand for public spending.

Suggested Citation

  • Persson, Emil & Tinghög, Gustav, 2020. "Opportunity cost neglect in public policy," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 301-312.
  • Handle: RePEc:eee:jeborg:v:170:y:2020:i:c:p:301-312
    DOI: 10.1016/j.jebo.2019.12.012
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    Cited by:

    1. Andreas Hefti & Peiyao Shen & King King Li, 2021. "Igniting deliberation in high stake decisions: a field study," ECON - Working Papers 378, Department of Economics - University of Zurich.

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    More about this item

    Keywords

    Opportunity cost neglect; Policymaking; Experts; Decision-making; Bias; Replication;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D1 - Microeconomics - - Household Behavior
    • H4 - Public Economics - - Publicly Provided Goods
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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