New Paternalism on the Slippery Slopes, Part 4: Context Dependence

by Glen Whitman

New paternalists have also relied on the notion of context dependence to justify their policies. But as with hyperbolic discounting, they unjustifiably assume the existence of an inconsistency of preferences gives the policymaker license to choose among the inconsistent preferences. That assumption is the paper’s next target (pp. 703-704):

For a variety of decisions, people are subject to what behavioral economists call context-dependence. This means that how they choose among two or more options depends on seemingly irrelevant aspects of how the situation is described. For example, medical patients are more likely to assent to a treatment with a 90% survival rate than one with a 10% death rate, even though these are the same. In this case, people seem to favor “positive” over “negative” framing. People also seem to prefer options framed as the existing or a baseline position; this may be called status-quo bias. Another example of the power of framing is the persistent difference between willingness-to-pay (WTP) and willingness-to-accept (WTA), meaning that people will demand more money to part with an item than they will pay to acquire it, even when the item’s value is a trivial portion of their wealth or income.The phenomenon of context-dependence underlies various new paternalist proposals. All of Sunstein and Thaler’s proposals for new contractual defaults, for example, rely on the difference between WTP and WTA. Although such defaults leave all contractual options open (at least for the most modest proposals), employees may be less willing to part with a given term (such as guaranteed paid vacation) than to bargain for its inclusion. If there were no difference between WTP and WTA, and if transaction costs were zero, then the realized terms of contract would be the same regardless of the default.

The problem with context-dependence is similar to that of hyperbolic discounting: the new paternalist argument relies on an internal inconsistency to justify intervention. There is no theoretical basis for choosing which behavior represents the individual’s “true” best interest as he sees it. Which better represents a person’s real preferences: what he is willing to pay for something or what he is willing to accept to part with it? There is no theoretically correct answer to this question, as Sunstein and Thaler admit: “If the arrangement of the alternatives has a significant effect on the selections the customers make, then their true ‘preferences’ do not formally exist.”

In the absence of a true underlying preference as the correct standard, what standard should be used? Sunstein and Thaler decline to answer that question: “We are not attempting to say anything controversial about welfare, or to take sides in reasonable disputes about how to understand that term.”

In short, there is no standard provided by behavioral economic theory. The answer to the “what standard” question will depend on policymakers’ own particular notions of welfare and well-being, as well as the weight they attach to autonomy. Notably, behavioral economics does not necessarily place any weight on autonomy, despite Sunstein and Thaler’s obeisance to the value of individual choice. Policymakers who adopt the new paternalists’ approach need not share their belief in choice. The new paternalist paradigm places them on a gradient from policies that only mildly restrict choice to policies that restrict or abolish it.

Additionally, we should realize that the supposedly beneficial default rules that S&T favor, such as a presumption of paid vacation, are not necessarily costless. Wages will adjust to account for the value of additional benefits. Thus, a new default rule does not simply give workers something they lacked before; it gives them something in exchanging for losing something else.

(As usual, full citations are available in the full paper. Cross-posted at Agoraphilia.)

3 thoughts on “New Paternalism on the Slippery Slopes, Part 4: Context Dependence

  1. I have been following both Rizzo’s and your work on New Paternalism for some time, and I agree with many of your arguments against the “what standard” question that S&T try to answer. In most cases, their reasoning for defining that standard is both flawed and inconclusive about where further “Libertarian Paternalistic” legislation would lead us.

    But I have to disagree with your outright dismissal of practical applications of New Paternalistic policies that can lead to increasing consumer welfare. Your position remains unmoved, or perhaps it fails to acknowledge the observed increases in benefit when these policies target situations of preference-failure due to high transaction costs or incomplete knowledge.

    Take for example, the implementation of default enrollment options in savings and retirement plans (not S&Ts proposals specifically, but the concept in general). It has been documented that more employees would rather be involved in saving plans, or would like to be saving more than they are now, but high transaction costs by means of paperwork, research, etc… and incomplete knowledge about available plans or employer-matching contribution programs have barred them from doing so. Data has proven that default enrollment dramatically improves participation rates, and dropout rates from these programs remain marginally unchanged. What reasoning can you provide that would adequately defend the status quo of hindered access to these and similar savings plans?

    It is understandable to assume that when enforcing previously unoffered terms, such as a paid vacation, employees will suffer the loss in wages to account for the additional benefit and it will be a wash. But being that these plans are already in place, and adjustments in wages will not be associated with participation, what does one have to argue with against this type of New Paternalistic policy?

  2. Aaron, I don’t have any problem with employers offering default enrollment in savings plans. My problem is with a legal requirement that they do so. You refer to the status quo of “hindered access” to such plans. If there are legal impediments to employers offering default enrollment, I would support removing those impediments.

    However, I would point out that if switching costs are indeed high and/or status quo bias is significant, then the fact that default enrollment plans have low drop-out rates cannot be taken as evidence that these plans are what people “really want.” They’re just sticking to the default.

    Nor does the fact that more people end up saving demonstrate these plans’ superiority. Remember that the new paternalist argument is not that saving more is inherently good, but that it’s what people “really want.”

    Finally, there is evidence suggesting that while the number of people participating in savings plans increases under auto-enrollment, the total amount of money saved is approximately unchanged. Why? Because some people who would have chosen to switch from zero contribution to a large contribution end up settling for the modest default contribution. In other words, changing the default causes some people to contribute more and others to contribute less, relative to what they would have contributed under the zero-contribution default.

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