Behavioral Nudges as an Incentive Problem

Behavioral nudges have come under recent scrutiny due to meta-analyses showing that the impact of nudges may be over-stated in academic studies relative to scaled nudges conducted by government nudge units. Unfortunately, the economics literature provides few, if any, theoretical mechanisms for understanding the limits of behavioral nudges. We develop a theoretical model, which examines behavioral nudges from the perspective of an incentive design problem, where discrete choice architecture strategies are used rather than monetary incentives. We propose that nudge incentive power should satisfy incentive compatibility conditions. This provides researchers with a clear theoretical mechanism for understanding when we should expect nudges to induce a response and when they might have muted effects across different contexts. We also highlight that when the social planner has a “common value” payoff function and consumers are heterogeneous, even a nudge that appears successful in inducing a response at the population level may not increase welfare. This is because a nudge is likely to induce a larger response from non-targeted subgroups rather than the targed subgroup. This creates an illusion of success where distortions are created with the non-targeted group while generating only weak or no response from the targeted group. Finally, we show that an optimal monetary based contract can induce targeted subgroups to respond while not creating distortions by the non-targeted subgroup.