Nudges versus financial incentives

Policymakers often have a choice among several policy instruments. The efficacy and cost of these interventions may be quite different. The principal policy alternatives often involve a choice between nudges and financial incentives. In some cases, such as informational warnings that remedy market failures, informational nudges are often the ideal policy option and are clearly superior to other policies. In other situations, there may be competing merits of nudges and financial incentives as the more appropriate policy choice. Nudges and financial incentives sometimes operate similarly in terms of their structure by making a particular option more desirable. This article applies the efficiency criteria developed in Viscusi (2022) for comparing nudges and financial incentives to an expanded and updated set of nudges and financial incentives. The policy contexts considered include retirement savings, college enrollment, energy conservation, and vaccinations. The relative efficiency of these nudge interventions compared to financial incentives depends in part on whether financial payments are treated as transfers rather than efficiency losses.