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Can Small Incentives Have Large Effects? The Impact of Taxes versus Bonuses on Disposable Bag Use

  • Tatiana A. Homonoff

    (Princeton University)

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    Financial incentives are an important policy tool for encouraging prosocial behavior. However, evidence on the effect of very small financial incentives is mixed. Drawing on an original data set, I investigate the effect of a five-cent shopping bag tax imposed in the Washington Metropolitan Area. Despite the small size of the incentive, I find that the tax decreased the fraction of customers using a disposable bag by a substantial amount. In contrast, a similar policy that offered customers a five-cent bonus for reusable bag use generated virtually no effect on behavior. This pattern is consistent with a model of loss aversion and underscores the importance of the form a financial incentive takes a tax versus a bonus when designing policies aimed at shaping consumer behavior.

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    Paper provided by Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 1483.

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    Date of creation: Mar 2013
    Date of revision:
    Handle: RePEc:pri:indrel:575
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