Which is a more effective way for government to influence consumption expenditure: through

conventional fiscal taxation policy or behavioral economic policy?

Ainslie, G. (1975). Specious reward: A behavioral theory of impulsiveness and impulse control.

American Psychological Association, 82, 463-496. Retrieved November 21, 2017, from

http://web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=1&sid=515646d2-cd14-4539-8339-

ea32c7a0a76d%40pdc-v-sessmgr01

In this article George Ainslie brings forth the idea of impulsive attitudes of the consumer
affecting their rational consumption decisions over infinite consumption outcomes. It focuses on
an experiment which presents different rewards to the consumers and so takes note of their
behavior and decisions. These perspectives here are broadened through the eyes of economics,
sociology, psychology and even psychiatry to delve into the mind of the consumer. The
underlying hypothesis creates a mathematical function of consumer choice and a time delay given
to the consumer before making the consumption decision. The writer uses experiments varying the
benefits the consumer derives by also varying the times delays within a control group of
consumers. My main concern is focuses on the impulse buying attitudes of consumers. It supports
my research question by showing how consumers will go out of rational bounds to give into
impulses and consume products they might not have really required. The other concern focuses on
the function of time delay and consumer satisfaction and how delaying the time of payment from
the time of consumption can induce consumers to purchase more as they do not feel the pain of
paying immediately. This is a clear connection with Dan Ariely’s article who created the concept
of the pain of paying. The procrastination factor also corresponds to Richard Thaler’s opt in opt
out model where behavioral policies prove to change consumption. The article puts the
effectiveness of this model in the form of mathematical equations as well as a graph showing the
exponential increase in the effectiveness of this experiment as the time delay increases. Therefore,
it provides credence to the theory of consumption being influenced by behavioral nudges.

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow™: Using Behavioral Economics to

Increase Employee Saving. Journal of Political Economy , 112(2). Retrieved November 21, 2017,

from http://www.journals.uchicago.edu/doi/10.1086/380085

In this article, we see Richard Thaler and Shlomo Benartzi bring forward ideas on the
fundamental problem of employee decision making based on their savings of income
earned. The problem specifies on how the savings rate of the working population based on
 the Health and Retirement Survey of Households are less than the forecasted life cycle
saving rates. Simply put, employees are not making sufficient contributions within their
saving accounts to ensure themselves a comfortable retirement. To tackle this problem
Richard Thaler devises the SMarT plan. The plan focuses on committing the workers into
the savings plan during the present, so that as their income earnings increase with time, they
will save more ensuring better retirement lives. This article provides a justification for my
research answer as to how, behavioral nudges can shift individual behavior. It uses a
statistical approach by creating a null hypotheses(H0) of how workers will not prefer the
SMarT plan and creating an alternative hypotheses(H1) where behavioral economics will
make the plan more attractive towards workers. By making the opt in plan the default
scheme, they successfully made the saving option more convenient to the worker allowing
them to save more money, dissuading consumption expenditure overall. This corresponds to
the studies done by George Anslie, Dan Ariely and William Congdon to show the
importance of time and how the procrastination factor causes consumers to behave
irrationaly. The article provides tables on the savings rate after SMarT implementation as
well as individual participation data providing the necessary statistics relating to my study.

Auerbach, A. J., & Kotlikoff, L. J. (1987). Dynamic Fiscal Policy. Cambridge University Press.

Retrieved November 21, 2017, from https://www.kotlikoff.net/content/dynamic-fiscal-policy.

In this article Auerbach and Laurence Kotlikoff discuss the fiscal policy and its dynamics. The article
moves through a through explanation of the fiscal policy from the perspective of manipulated tax
rates and varied government expenditure depending on the economic climate. Mathematical
equations show the effect of such policies on the economy which is the first basis of my research
question. It does prove how fiscal policy can influence consumption expenditure by affecting
consumer’s marginal propensity to consume by changes in their disposable income. The authors
provide a two-sided argument which show how tax cuts on both profits and income can
incentivize both investment from firms and consumption from households respectively and how
the opposite effect can be seen in the case of a tax increase. However, in support of my question as
to how behavioral policies are more effective as compared to fiscal policies, the authors provide
proof of the failures of fiscal policies as well. Their focus moves to government budget deficits
which is caused by them borrowing from the private sector to finance the deficit and causing the
crowding out effect. Although this article does not correspond to behavioral policies, it makes
clear the limitations of fiscal policies and how tax changes might not be the best solution to the
economy in which behavioral policies proposed by Richard Thaler and George Ainslie come up,
 which focuses on making it more convenient for consumers to act a certain way to achieve the end
goal. Auerbach and Kotlikoff’s findings provide the limitations of fiscal policy, against which I
try to provide more efficient solutions in my research question.

Carlson, K. M., & Spencer, R. W. (December 1975). Crowding Out and Its Critics. The University of

Tennessee. Retrieved December 1, 2017, from

https://www.utm.edu/staff/davidt/finance/ISLM/Crowding_Dec1975.pdf.

This article by Keith M. Carlson and Roger W. Spencer focuses on an important shortfall of the fiscal
policy, which my research question tries to tackle using rational nudges. The crowding out effect
and its types are looked at here. The writers focus on crowding out effects on various situations
based on the liquidity money curve. The effect is shown in situations of varying liquidity of
money curves where the curves are both vertical and horizontal showing differences in the
sensitivity to interest rates. The writers however, show how the budget deficit of the government
can greatly cause a fall in the portion of the private sector within the economy. They acknowledge
how fiscal policies can cause consumption to change, which I had also covered in my research
question. However, this is not the best policy to use due to the mentioned effects of crowding out,
which takes a toll on private expenditure which is the larger portion of expenditure of most
economies. This strengthens the article of Auerbach and Laurence Kotlikoff by adding layers to
the problems of the crowding out effect. Although behavioral nudges were not the primary focus
of this article, it provides the basic framework of the research question of where I try to provide
better solutions to affecting consumption rather than fiscal policies.

Thaler, R. H., & Benartzi, S. (8 March 2013). Behavioral Economics and the Retirement Savings

Crisis. American Association for the Advancement of Science, 339(6124). Retrieved December 1,

2017, from http://science.sciencemag.org/content/339/6124/1152.full

This article by Richard Thaler and Shlomo Benartzi focuses on the USA retirement savings crisis in
1983. The chances of workers facing inadequate funds to support their retirements had seen a 22%
rise. However, Richard Thaler provides a model which had proved to solve this problem of more
 consumption of take home income rather than saving for the future. This brings forth one of the
behavioral solutions I had mentioned in my research question which is the opt in vs opt out.
Richard Thaler’s experiment included defaulting employees into the saving plan and giving them
the option of opting out of it. Previously it was the opposite, where procrastination caused many
employees to not enroll in the scheme at all. This new model was also accompanied by an
automatic escalation method, where the rate of savings was scaled over time based on pay rises, so
that the workers do not think they were losing out on their consumption ability. The article
provides a graph showing the popularity of this policy, as more employers start to adopt the SMT
plan. This provides the main argument against the findings of Keith M. Carlson’s team as well as
Laurence Kotlikoff’s team. It provides a new method of applied behavioral economics which
nudge employees by manipulating the convenience of deciding. This corresponds to Richard
Thaler’s second article of the SMT plan as well as George Ainslie’s article of manipulating small
factors such as time and convenience to influence decision making. This method is what I mention
in my research analysis as an argument against the shortcomings of fiscal policies as mentioned by
the separate articles of Laurence and Keith.

Stratman, T., & Okolski, G. L. (June 10, 2010). Does Government Spending Affect Economic

Growth? George Mason University. Retrieved December 1, 2017, from

https://www.mercatus.org/publication/does-government-spending-affect-economic-growth.

This article delves into the side of the failures of government policies when implemented to influence
the consumption expenditure of the economy. Thomas Stratmann and Gabriel Lucjan Okolski
provide a good framework upon which I base my main argument of my research question. It first
brings forward the influence of politics in government spending by citing the work of Professor
Emeritus from George Mason University. He puts forward the common occurrence of government
expenditure favoring groups who give them a chance to get reelected. The article provides a clear
connection between government expenditure before elections and its direct relationship with
political votes. Besides that, we move into the problem of crowding out once again, a major flaw
in the design of fiscal policies. He analyzed the countries within The Organization for Economic
Co-operation and Development and showed a negative correlation between government
expenditure and private investment. This shows the correspondence between this article and the
works of Keith M. Carlson, Auerbach which all prove the inadequacies of the fiscal policy in
succeeding to cause significant changes in consumption. While this does not provide much
solutions in the behavioral perspective, they build the failures of the fiscal policy upon which I can
advocate behavioral policies through my research on the works of Richard Thaler, Dan Ariely and
George Anslie.

Rioja, F. K., & Christie, T. A. (July 2012). Debt and Taxes: Financing Productive Government

Expenditures. University of the West Indies. Retrieved December 4, 2017, from

http://www2.gsu.edu/~ecofkr/papers/TCFR_paper.pdf

In this article Felix K. Rioja and Tamoya A.L. Christie talk about more relationships between
government expenditure and economic growth. This paper has a more optimistic view on the fiscal
policy as they have derived a relationship between how the taxation policy might prove to be
successful. The writers developed a two-way model in which they prove that tax raises to support
government revenue as they increase expenditure might increase long term growth. However, a
prerequisite for this to work, is that the tax rates themselves must be low in real terms. The sticky
nature of consumption would not cause much of a fall in consumption itself. Although this
provides a good example of how the crowding out effect as mentioned by the papers of Thomas
Stratmann, Keith M. Carlson and Laurence Kotlikoff can sometimes be rebutted, it also shows a
side of failure. The article uses mathematical equations to show that even if public spending is done
in an efficient and restructured way, it is still financed by debt which raises the cost of debt
servicing as well as an increase in interest rates which can negatively affect the marginal propensity
to consume. This article as well as the ones made by Keith M Carlson and Laurence Kotlikoff
provide the failures of the fiscal policy in a structured way, opening up the possibilities of more
subtle devices such as the one Richard Thaler used where the employees where opted into the plan
by default. This paper provides good evidence for my stated detriments of the fiscal policy in my
research answer against which I provide behavioral arguments.
Ariely, D., & Loewenstein, G. (December 1999). When does duration matter in judgment and

decision making? American Psychological Association. Retrieved December 1, 2017, from

http://web.a.ebscohost.com/ehost/detail/detail?vid=0&sid=8121d192-3aed-47a3-abec-

7c0a3335adb2%40sessionmgr4007&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#A

N=2000-16324-010&db=pdh

In this article Dan Ariely and George Lowenstein brings forth behavioral devices to influence
consumption practices. Like the policies from the other cited economists I used in my research
question, like Richard Thaler and George Ainslie, subtlety is key. These policies are much easier
to implement, without a lot of administrative issues or time lag which would have been faced in
the case of a government policy such as fiscal policy. The key variable Dan Ariely influences here
is time. He stresses how manipulating the time between the effect of consumption and the result of
consumption could influence the behavior of consumers. His experiments included four models
where he varied the durations between consumption with a decreasing and increasing rate of
satisfaction on each experiment. The results concluded that people will add a lot of weight to
duration when they compare or choose between sequence of choices upon which they are paying a
price. A link between this and Richard Thaler’s opt in model also lies in the time factor. When
workers were initially opted out of the plan by default, they were expected to opt in to the savings
scheme. The problem here, as both economists identified is the time between the desired action of
the worker and the actual effect. The duration left time for procrastination, which proves my
research point of how the opt in method was so successful compared to deflationary fiscal policies
to inspire savings. This article, provided another behavioral perspective on this situation and
provided more examples of how careful consideration of such policies might be beneficial.

Congdon, W., Kling, J. R., & Mullainathan, S. (September 2009). BEHAVIORAL ECONOMICS

AND TAX POLICY. NATIONAL BUREAU OF ECONOMIC RESEARCH. Retrieved December

1, 2017, from http://www.nber.org/papers/w15328

This article by William Congdon, Jeffrey R. Kling and Sendhil Mullainathan concentrates on a
conjunction of both behavioral policies and tax policies. The way of thinking concentrates more
on a conjunction of the two methods which provides a newer perspective to my research where
both the policy under question and the remedial policy work together to create the desired effect.
The article first discusses how fiscal policy alone ends up being a failure which I had discussed
in my research and which was also supported by the articles of Felix K. Rioja, Thomas
Stratmann and Roger W. Spencer. Empirical evidence is provided showing how good taxes
achieve the desired effect only in certain cases. One is when the tax rates are already low,
corresponding to the findings Felix K. Rioja and Tamoya A.L. Christie in their article of Debt
and Taxes: Financing Productive Government Expenditures. Secondly, tax policies mainly prove
beneficial when applied on goods with inelastic demand. The writers then bring in ideas of
behavioral policies within this system. It takes on the idea that people fail to act rationally and
are not accounting units. While Richard Thaler and Dan Ariely mainly manipulated time within
their research, William Congdon manipulated complexity. He stated that if taxes are presented to
consumers in a simpler way which is easier to comprehend, tax evasive activities will decrease
and the effect of the tax will be more widespread. A clear connection can be seen between this
and Richard Thaler’s work as in terms of time as well. If tax application and waiting time costs
are too high, procrastination takes place and people put off filing or signing up for the automatic
tax system which brings about the inefficiency in the tax system. As I had stated, in my research
answer, behavioral policies just make it more convenient to people of making a certain choice.
The works of these three economists suggest the same, where there applied findings created
successful models which worked as a great reference in my research answer.