Behavioral Economics and Public Sector Reform

Interesting paper by Gaël Raballand and Anand Rajaram

Starting with the hypothesis that behaviors are the critical (and often overlooked) factor in public sector performance, this paper explores the notion of how behavioral change (and thus institutional change) might be better motivated in the public sector. The basis for this study is "an accidental experiment" resulting from the World Bank's operational engagement in Cameroon. In 2008, World Bank staff successfully concluded preparation on a project to support the Government of Cameroon to improve transparency, efficiency, and accountability of public finance management. The US$15 million project supported a number of ministries to strengthen a broad range of management systems and capacities. Independently and concurrently, other Bank staff initiated a low-profile, technical assistance project to improve performance in Cameroon's Customs, supported by a small trade facilitation grant of approximately US$300,000. One approach appears to have succeeded in initiating change while the other has signally failed. The two projects of different scale, scope and design in the same governance environment offer a very interesting natural experiment (unplanned but accidental for that reason) that allows insights into the nature of institutional change and the role of behavior and incentives and approaches that offer greater prospects for making reform possible. The paper confirms the value of using ideas from behavioral economics, both to design institutional reforms and to critically assess the approach to institutional reform taken by development agencies such as the World Bank.

I like the discussion on behavioral econ concepts related to conception and implementation of reforms, such as: "the planning fallacy," "the authorization imperative," "optimism bias," and "loss aversion."  

From a Speech by Daniel Kahneman

We did not prove that humans are irrational. I would draw a very important distinction between demonstrating that people are not rational by a particular definition of rationality, especially an absurd one, and claiming that people are irrational. I do not plead guilty; I plead innocent of having ever made the claim that people are irrational. It was made on our behalf more than once. We always regretted it and rejected it. Irrationality conveys something much, much stronger than the view of human nature that Amos Tversky and I ever held.

That is from a speech by Daniel Kahneman. 

Behavioral Econ: Defaults

Two cases where defaults work: 1 and 2. 

Behavioral economics

When people are informed of the benefits or risks of engaging in certain actions, they are far more likely to act in accordance with that information if they are simultaneously provided with clear, explicit information about how to do so. [P. 4].

That is from a new piece by Cass R. Sunstein (February 2013).