American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
When Do "Nudges" Increase Welfare?
American Economic Review
vol. 115,
no. 5, May 2025
(pp. 1555–96)
Abstract
We use public finance sufficient statistic approaches to characterize the welfare effects of "nudges," such as simplified information and warning labels, in markets with taxes and endogenous prices. While many studies focus on average effects, we show that welfare also depends on how the nudge affects the variance of choice distortions, and average effects become irrelevant with zero pass-through or optimal taxes. We implement the framework with experiments evaluating automotive fuel economy labels and sugary drink health labels. Labels decrease purchases of low-fuel economy cars and sugary drinks but may decrease welfare because they increase the variance of choice distortions.Citation
Allcott, Hunt, Daniel Cohen, William Morrison, and Dmitry Taubinsky. 2025. "When Do "Nudges" Increase Welfare?" American Economic Review 115 (5): 1555–96. DOI: 10.1257/aer.20231304Additional Materials
JEL Classification
- D18 Consumer Protection
- D62 Externalities
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- L62 Automobiles; Other Transportation Equipment; Related Parts and Equipment
- L66 Food; Beverages; Cosmetics; Tobacco; Wine and Spirits