Sunday, August 22, 2010

Choosing among public policy alternatives

In a recent op-ed in the New York Times, George Loewenstein, one of the founding fathers of behavioral economics, struck a note of caution on the euphoria surrounding the use of nudge-based solutions to addressing major public policy problems.

"Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks. But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges."

Felix Salmon adds this interesting dimension of analysis in the context of the Ubel-Loewenstein argument,

"Consider an issue with two possible lines of attack: a cheap behavioral-economics solution, B, and a more expensive and politically-fraught substantive solution, S. Does implementing B make implementing S less likely? If B didn’t exist, would S be more likely to come about? Surely there are cases where the answer to both questions is yes — and where therefore behavioral economics is a bad thing, not a good thing. The ability to cover up issues with a behavioral band-aid is often just a way of doing as little as possible while appearing to tackle the issue at hand.

That said, in a lot of cases S would never happen anyway, and in those cases B is better than nothing. And in other cases S will happen either way, and again adding B to the mix is going to be a good thing. So the only cases we’re worried about are the ones where the existence of B significantly changes the likelihood of implementing S."

Now, a whole host of public policy challenges and their possible solutions can be subjected to the "Salmon Test". It can be an excellent touchstone to choose from among competing policy alternatives.

Let me illustrate this dilemma with the problem of improving learning outcomes in schools. School performance is intimately related to teacher and student attendance, which determines the quality of teaching-learning. The existing school regulatory architecture contains adequate provisions for monitoring attendance, though not the final learning outcomes.

In view of the aforementioned, the government has a choice of either strengthening its supervisory mechanism (S) or designing an IT-based performance evaluation system that can accurately reflect teaching-learning outcomes and use that to nudge teachers, students and parents (B). The longitudinal data (tracking child learning outcomes over entire primary schooling and teacher value-addition) generated from the latter can then be deployed in the form of appropriate nudges to first get teachers and students to attend, then push them into improving their performances, and finally informing and getting parents more closely interested in their child's progress.

The former (S) while being difficult to implement, is evidently more sustainable and certain of its effect. In contrast, the later (B) presents a less difficult (more technology-centric) and attractive populist behavioral solution, though it is vulnerable to generating some unanticipated incentive distortions (eg. gaming the tests to inflate results). In the circumstances, as Felix Salmon wrote, there is the distinct possibility that governments would prefer the later and ignore the former.

It is also natural (given the limited supervisory bandwidth and other resources) that the implementation of Plan B would significantly reduce the likelihood of implementation of Plan S. However, the choice becomes clearer once we analyze the possibility of pushing through Plan S. Given the formidable administrative and political challenges (unions etc) to be overcome in establishing a strong and consequently effective supervisory mechanism, the possibility of Plan S getting implemented is remote. In the circumstances, Plan B naturally emerges as the only available alternative.

In other words, Plan B passes the "Salmon Test" as the preferred policy direction for improving learning outcomes in primary schools.

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