BEHAVIORAL ECONOMICS AND PUBLIC POLICY

API 304, Spring 2015

Harvard Kennedy School

Overview:

This course will examine the relationship between behavioral economics and
public policy. Individuals frequently make decisions that systematically depart
from the predictions of standard rational actor economic models. Behavioral
economics attempts to explain these departures by integrating an understanding
of the psychology of human behavior into economic analysis.
This course will review the major themes of behavioral economics and address
their implications for public policy in a wide variety of policy relevant domains,
including: savings, consumer credit, education, labor markets, energy use, health
care, revenue collection and tax compliance, social welfare programs, and the
political process.
The goal of the course is to illustrate how an understanding of behavioral
economics can improve public policy and to enable students to think critically
about the types of solutions that will best address policy problems.

Time/Place:

T/R 8:40-10, Littauer 280

Instructor:

Professor Brigitte C. Madrian

Office: Taubman 348
Phone: 617-495-8917
E-Mail: brigitte_madrian@harvard.edu

Office hours:

Office hours will be posted weekly on the course website. Please make an
appointment with my faculty assistant in advance (see below).

Assistance:

Faculty Assistant:
Kathleen Schnaidt
Littauer 207B
617-495-9913

Course Assistants:
Maria Vargas maria_vargas@hks15.harvard.edu
Mario Jaimes mario_jaimes@hks15.harvard.edu

kathleen_schnaidt@hks.harvard.edu

Class web site:

The course website, which should be automatically accessible to all HKS students
registered for the course, is:
https://coursepages.knet.hks.harvard.edu/sites/9780/Pages/Default.aspx
If you are a non-HKS student interested in taking the class for credit, crossregistration begins on Tuesday, January 20, at noon.

To obtain access to the course website as a cross-registrant, please follow the

instructions on the HKS Cross-Registration Website:
http://www.hks.harvard.edu/degrees/registrar/cross-registration
Prerequisites:

A first-year course in economics. A first-year course in statistics is helpful.

Readings:

William J. Congdon, Jeffrey R. Kling and Sendhil Mullainathan. 2011. Policy and
Choice: Public Finance through the Lens of Behavioral Economics, Brookings
Institution Press.
Richard H. Thaler and Cass R. Sunstein. 2009. Nudge: Improving Decisions about
Health, Wealth, and Happiness (Updated Edition), Penguin Books.
Danial Kahneman. 2011. Thinking Fast and Slow. Farrar, Strauss and Giroux.
NOTE: All of the books above are available in hardcover, paperback, and kindle
editions. Policy and Choice is also available as a free PDF
(http://www.brookings.edu/~/media/Press/Books/2011/policyandchoice/policya
ndchoice_book.pdf). Nudge and Thinking Fast and Slow are also available as an
unabridged audiobooks.
Additional readings will be posted to the class website.

Grading:

Grades will be determined by the following factors:

Assignments
Participation
Mid-term (Thursday, April 16)
Final Project/Paper (Friday, May 8, noon)

30%
10%
30%
30%

Assignments: Several assignments will be distributed throughout the semester

(approximately one every week or two). Your lowest grade will be dropped.
Because you get one freebie, late assignments will not be accepted.
Participation: Engagement in the material and with your classmates is critical to
the classroom experience. Your participation grade will be determined by
attendance, participation in classroom discussions, and participation in pre-class
exercises.
Mid-term exam: An in-class midterm will be given in class on Thursday, April 16.
Final Paper/Project: In lieu of a final exam, you will do a project/paper on a topic
of your choice in which you identify a policy problem of interest to you and then
write up a discussion of potential policy solutions that are informed by behavioral
economics. This can be done individually or as a small group (2-3 individuals). If
done as a group, the expected length of the project will be longer. More
information on this assignment will be given in class at a later date. Due at noon,
Friday, May 8.

API 304: ECONOMIC ANALYSIS OF PUBLIC POLICY

SCHEDULE OF COURSE MEETINGS
DATE

TOPIC

T January 27

SNOW--Class Cancelled

R January 29

Course Framework/Introduction

T February 3

Foundations of Behavioral Economics: Present Bias

R February 5

Foundations of Behavioral Economics: Prospect Theory

T February 10

SNOW--Class Cancelled

R February 12

Savings: Participation and Contribution Rates

T February 17

Savings: Developing countries

R February 19

Savings: Asset allocation

T February 24

Consumer credit

R February 26

Consumer credit

T March 3

Consumer credit

R March 5

Insurance

F March 6

MAKE-UP Class--Insurance

T March 10

Health behavior and health policy

R March 12

Health behavior and health policy

March 17 19

NO CLASS Spring Break

T March 24

Education policy

R March 26

Education policy

T March 31

Labor market policy

R April 2

Labor market policy

T April 7

Environmental policy

R April 9

Environmental policy

T April 14

Politics and the political process

R April 16

IN CLASS EXAM

T April 21

Politics and the political process

R April 23

Government revenue

T April 28

Government revenue

R April 30

Conclusion/Wrap-up

F May 8

FINAL PAPER/PROJECT DUE at NOON

READINGS
Tuesday, January 27 (SNOWCLASS CANCELLED)
Thursday, January 29
Brigitte Madrian. 2014. Applying Insights from Behavioral Economics to Policy Design.
Annual Review of Economics.
Daniel Kahneman. 2011. Thinking Fast and Slow. Chapters 1-3, pp. 19-49.
Policy and Choice, Chapter 2 (Psychology and Economics, pp. 17-39) and Chapter 3
(Behavioral Economics and Public Finance, pp. 40-66).
Tuesday, February 3
Christopher Chabris, David Laibson, and Jonathan Schuldt. 2008. "Intertemporal
Choice." Palgrave Dictionary of Economics.
Thursday, February 5
Daniel Kahneman. 2011. Thinking Fast and Slow. Chapters 25-27, pp. 269-299.
Nicholas C. Barberis. 2013. Thirty Years of Prospect Theory in Economics: A Review and
Assessment. Journal of Economic Perspectives 27(1): 173-96.
Tuesday, February 10 (SNOWCLASS CANCELLED)
Thursday, February 12
Brigitte C. Madrian. 2013. Matching Contributions and Savings Outcomes: A Behavioral
Economics Perspective. In Richard Hinz, Richard Holzman, David Tuesta and Noriyuki
Takayama editors, Matching Contributions for Pensions: A Review of International
Experience, The World Bank, pp. 289-310.
Richard H. Thaler and Shlomo Benartzi (2004). Save More Tomorrow: Using Behavioral
Economics to Increase Employee Saving. Journal of Political Economy 112(1): S164-S187.

Tuesday, February 17
Dean Karlan. 2010. Helping the Poor Save More. Stanford Social Innovation Review.
Alexandra Fiorillo, Josh Wright and Louis Potok. 2014. Applying Behavioral Economics to
Improve Microsavings Outcomes. ideas42 Working Paper.
<http://www.ideas42.org/publication/view/applying-behavioral-economics-to-improvemicrosavings-outcomes/>
Gharad Bryan, Dean Karlan and Scott Nelson. 2010. Commitment Devices. Annual Review
of Economics, Vol. 2: 671-698.
Dilip Soman and Amar Cheema. 2011. Earmarking and Partitioning: Increasing Saving by
Low Income Households. Journal of Marketing Research, 48(S1): S14-S22.
Thursday, February 19
Brad Barber and Terrance Odean. 2011 The Behavior of Individual Investors. In George
Constantinides, Milton Harris and Rene Stultz, Handbook of the Economics of Finance,
Volume 2 (Elsevier), pp. 1533-69.
<http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%2
0individual%20investors.pdf>
James J. Choi, David Laibson and Brigitte C. Madrian. 2009. Mental Accounting in Portfolio
Choice: Evidence from a Flypaper Effect. American Economic Review, 99(5):2085-95.
doi:10.1257/aer.99.5.2085
James J. Choi, David Laibson and Brigitte C. Madrian. 2010. Why Does the Law of One Price
Fail? An Experiment on Index Mutual Funds. Review of Financial Studies, 23(4): 1405-1432.
doi:10.1093/rfs/hhp097
Tuesday, February 24
Nudge, Chapter 8 (Credit Markets, pp. 132-144)
Daniel Kahneman. 2011. Thinking Fast and Slow. Chapters 11, pp. 119-128.
Susan E. Woodward and Robert E. Hall (2010). Consumer Confusion in the Mortgage
Market: Evidence of Less than a Perfectly Transparent and Competitive Market. American
Economic Review: Papers & Proceedings, 100(May 2010): 511-515.
John Y. Campbell, Howell E. Jackson, Brigitte C. Madrian and Peter Tufano (2011).
Consumer Financial Protection. Journal of Economic Perspectives 25(1): 91-114.
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Thursday, February 26
George Loewenstein, Cass R. Sunstein and Russell Golman (2014). Disclosure: Psychology
Changes Everything. Annual Review of Economics 6: 391-419.
Marianne Bertrand and Adair Morse (2011). Information Disclosure, Cognitive Biases, and
Payday Borrowing. Journal of Finance, 66(6): 1865-1893.
Santosh Anagol and Hugh Hoikwong Kim (2012). The Impact of Shrouded Fees: Evidence
from a Natural Experiment in the Indian Mutual Fund Market. American Economic Review
102(1): 576-593.
Tuesday, March 3
Michael Barr, Sendhil Mullainathan and Eldar Shafir (2009). The Case for Behaviorally
Informed Regulation, in David Moss and John Cistierno, New Perspectives on Regulation,
Cambridge, MA: The Tobin Project pp. 25-61.
<http://www.tobinproject.org/sites/tobinproject.org/files/assets/New_Perspectives_Full_T
ext.pdf#page=25 >

Thursday, March 5
Policy and Choice, Chapter 4 (Asymmetric Information, pp. 69-83). NOTE: This is only part
of the chapter.
Jeffrey R. Brown (2007). Rational and Behavioral Perspectives on the Role of Annuities in
Retirement Planning. NBER Working Paper No. 13537.
http://www.nber.org/papers/w13537.pdf?new_window=1
Daniel Kahneman (2011). Thinking Fast and Slow. Chapter 34 (pp. 363-74).
John W. Payne, Namika Sagara, Suzanne B. Shu, Kirstin C. Appelt and Eric J. Johnson (2013).
Life Expectancy as a Constructed Belief: Evidence of a Live-To or Die-By Framing Effect.
Journal of Risk and Uncertainty 46(1): 27-50.
Friday, March 6
Howard C. Kunreuther, Mark V. Pauly and Stacey McMorrow (2013). Insurance and
Behavioral Economics: Improving Decisions in the Most Misunderstood Industry. Chapter 6-7
(pp. 95-144).

Policy and Choice, Chapter 4 (Asymmetric Information, pp. 83-98). NOTE: This is only part
of the chapter.
Daniel Kahneman. 2011. Thinking Fast and Slow. Chapters 10, 12 and 30, pp. 109-118, 129136 and 322-333.
Yaniv Hanoch, Thomas Rice, Janet Cummings and Stacey Wood (2009). How Much Choice
Is Too Much? The Case of the Medicare Prescription Drug Benefit. Health Services
Research, 44(4): 1157-1168.
Tuesday, March 10
Pascaline Dupas (2011). Health Behavior in Developing Countries. Annual Review of
Economics 3:425-49.
Eric J. Johnson and Daniel Goldstein (2003). Do Defaults Save Lives? Science (November
21, 2003): 1138-39.
Katherine Milkman, John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian
(2011). Using Implementation Intentions Prompts to Enhance Influenza Vaccination Rates.
PNAS 108(26): 10415-20.
Thursday, March 12
Jonathan Gruber (2002). Smokings Internalities. Regulation (Winter) 52-57.
Kevin G. Volpp et al. (2009). A Randomized, Controlled Trial of Financial Incentives for
Smoking Cessation. The New England Journal of Medicine 360(7): 699-709.
Kevin G. Volpp et al. (2008). Financial Incentive-Based Approaches for Weight Loss: A
Randomized Trial. JAMA 300(22): 2631-37.
Gary Charness and Uri Gneezy (2009). Incentives to Exercise. Econometrica 77(3): 909931.
Tuesday March 17/Thursday March 19
SPRING BREAKNO CLASS
Tuesday, March 24
Policy and Choice, Chapter 5 (Externalities and Public Goods, pp. 131-139). NOTE: This is
only part of the chapterthe part on public goods and education).

Nudge, Chapter 13 (Improving Schools, pp. 199-206).

Eric Bettinger, Bridget Terry Long, Philip Oreoupoulos and Lisa Sanbonmatsu (2012). The
Role of Application Assistance and Information in College Decisions: Results from the H&R
Block FAFSA Experiment. Quarterly Journal of Economics 127(3): 1205-1242.
Amanda Pallais (2013). Small Differences Matter: Mistakes in Applying to College. NBER
Working Paper No. 19480.
http://scholar.harvard.edu/files/pallais/files/small_differences_that_matter_1.pdf
Najy Benhassine, Florencia Devoto, Esther Duflo, Pascaline Dupas and Victor Pouliquen
(2013). Turning a Shove into a Nudge: A Labeled Cash Transfer for Education. NBER
Working Paper No. 19227.

Thursday, March 26
David Just and Joseph Price (2013). Using Incentives to Encourage Healthy Eating in
Children. Journal of Human Resources 48(4): 855-872.
Steven Levitt, John List, Susanne Neckermann and Sally Sadoff (2012). The Behavioralist
Goes to School: Leveraging Behavioral Economics to Improve Educational Performance.
NBER Working Paper No. 18165.
Roland Fryer (2011). Financial Incentives and Student Achievement: Evidence from
Randomized Trials. Quarterly Journal of Economics 126(4): 1755-1798.

Tuesday, March 31
Emir Kamenica (2012). Behavioral Economics and the Psychology of Incentives. Annual
Review of Economics 4:427-52.
Roland Fryer (2013). Teacher Incentives and Student Achievement: Evidence from New
York City Public Schools. Journal of Labor Economics 31(2):373-427.
Paul Glewwe, Nauman Ilias and Michael Kremer (2010). Teacher Incentives. American
Economic Journal: Applied Economics 2(July 2010):205-227.

Thursday, April 2
Policy and Choice, Chapter 4 (Asymmetric Information, pp. 98-106). NOTE: This is only
part of the chapterthe part on public goods and education.

Linda Babcock, William J. Congdon, Lawrence F. Katz and Sendhil Mullainathan (2012).
Notes on Behavioral Economics and Labor Market Policy. IZA Journal of Labor Policy 1:2
<http://link.springer.com/article/10.1186/2193-9004-1-2 >
Ernst Fehr, Lorenz Goette, and Christian Zehnder (2007). The Behavioral Economics of the
Labor Market: Central Findings and Their Policy Implications.
<http://bostonfed.org/economic/conf/BehavioralPolicy2007/chapter4.pdf >

Tuesday, April 7
Nudge, Chapter 12 (Saving the Planet, pp. 183-196)
Policy and Choice, Chapter 5 (Externalities and Public Goods, pp. 107-131). NOTE: This is
only part of the chapterthe part on Externalities.
Richard P. Larrick and Jack B. Soll (2008). The MPG Illusion. Science, 320(5883):1593-94.
Daniel Pichert and Konstantinos V. Katsikopoulos (2008). Green Defaults: Information
Presentation and Pro-Environmental Behavior. Journal of Environmental Psychology 28: 6373.

Thursday, April 9
Behavioural Insights Team (2011). Behaviour Change and Energy Use, UK Cabinet Office.
Noah Goldstein, Robert Cialdini and Vladas Griskevicius (2008). A Room with a Viewpoint:
Using Social Norms to Motivate Environmental Conservation in Hotels, Journal of
Consumer Research, 35(3): 472-82.
Mark Bernstein and Myles Collins (2014). Saving Energy through Better Information: A New
Energy Paradigm? Contemporary Economic Policy 32(1): 219-229.

Tuesday, April 14
Alan S. Gerber, Donald P. Green and Christopher W. Larimer (2008). Social Pressure and
Voter Turnout: Evidence from a Large-Scale Field Experiment. American Political Science
Review 102(1): 33-48.
David W. Nickerson and Todd Rogers (2010). Do You Have a Voting Plan? Implementation
Intentions, Voter Turnout and Organic Plan Making. Psychological Science 21(2):194-99.

Christopher J. Bryan, Gregory M. Walton, Todd Rogers and Carol W. Dweck (2011).
Motivating Voter Turnout by Invoking the Self. PNAS 108(31): 12653-12656.

Thursday, April 16
MID-TERM EXAM
Tuesday, April 21
Daniel E. Ho and Kosuke Imai (2008). Estimating Causal Effects of Ballot Order from a
Randomized Natural Field Experiment: The California Alphabet Lottery, 1978-2002. Public
Opinion Quarterly 72(2): 216-40.
Rohini Pande and Deanna Ford (2011). Gender Quotas and Female Leadership: A Review.
Working Paper.
Katherine L. Milkman, Mary Carol Mazza, Lisa L. Shu, Chia-Jung Tsay and Max H. Bazerman
(2012). Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative
Outcomes. Organizational Behavior and Human Decision Processes 117(2012):158-167.

Thursday, April 23
Policy and Choice, Chapter 7 (Taxation and Revenue, pp. 173-200).
Andrew Leicester, Peter Levell and Imran Rasul (2012). Tax and Benefit Policy: Insights
from Behavioural Economics. NOTE: Focus on Section 4Sections 1-3 should be mostly
familiar, but if you want to read them they will be a good review; section 7 is for next class;
section 6 for the class after that.

Tuesday, April 28
Andrew Leicester, Peter Levell and Imran Rasul (2012). Tax and Benefit Policy: Insights
from Behavioural Economics. NOTE: Focus on Section 7.
Behavioural Insights Team (2012). Applying Behavioural Insights to Reduce Fraud, Error
and Debt, UK Cabinet Office.
Michael Hallsworth, John List, Robert Metcalfe and Ivo Vlaev (2014). The Behavioralist as
Tax Collector: Using Natural Field Experiments to Enhance Tax Compliance. NBER Working
Paper No. 20007.

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Thursday, April 30
Fredric Jacobsson, Magnus Johannesson and Lars Borgquist (2007). Is Altruism
Paternalistic? Economic Journal 117(520): 761-781
Saurab Bhargava and Dayanand Manoli (2013): Why Are Benefits Left on the Table?
Assessing the Role of Information, Complexity, and Stigma on Take-up with an IRS Field
Experiment

11