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Innovative Behavioral Approaches to Analyze the Incentives of Environmental Instruments

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New Perspectives for Environmental Policies Through Behavioral Economics

Abstract

This article gives an overview of recent discussions on behavioral economics and its importance both in reevaluating known instruments of environmental policy and in figuring out new instruments in this policy area. In reporting on recent discussions in behavioral economics, a distinction is made between (mostly experimentally) observed effects (e.g. the framing effect or the endowment effect) and concepts which try to generalize these effects theoretically (prospect theory and concepts of bounded rationality, for instance). Against this backdrop, contributions of behavioral economics which already take environmental instruments into account are systematized according to the instrument they focus on and according to the addressees they have in mind. On this basis, an assessment as regards the most important behavioral effects and insights in discussing issues of environmental policy is presented. This is accomplished by evaluating that part of the insights made in recent research of behavioral economics that have not yet been applied to the issue of environmental policy. It is here in particular that the concepts mentioned above come into play; going beyond a mere modification of canonical subjective utility theory then becomes a key analytical strategy in figuring out and assessing environmental instruments. Finally, the article sketches out potential avenues for further research towards a refreshed conceptual and instrumental framework for environmental policy.

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Notes

  1. 1.

    More precisely: the private (net) benefit in terms of goal attainment is portrayed as a function of the activity level and the first derivative of this function (i.e. the marginal net benefit) is related to the first derivative of the damage function which is also related to the activity level (i.e. the marginal damage function).

  2. 2.

    In a pragmatic solution the desired level of environmental impact is assumed to be given as the outcome of a political process. Then the task of regulation is reduced to find a cost-minimizing implementation of instruments generating the desired level of impact.

  3. 3.

    Origins and development of behavioral economics are discussed in Sent (2004) and Earl (1988).

  4. 4.

    In most cases decisions under risk are considered.

  5. 5.

    Regarding the recent findings in laboratories as well as in the field this term seems to be a misnomer because it is related to the traditional rationality standard as ‘normal’ whereas it turns out that this is a rather fictitious measuring rod.

  6. 6.

    This distinction corresponds to a switch in the focus when considering decision anomalies: from rationality distortion to decision enabling. This switching marks the difference between the starting and the actual orientation of research into anomalies.

  7. 7.

    The implications of this distinction are discussed in Chap. 8.

  8. 8.

    This has far reaching implications for the tools of standard analysis like indifference curves, Edgeworth-box as well as demand and supply functions (cf. Kahneman and Tversky 2000, p. 152, 160, 177).

  9. 9.

    The role of the reference point for decision making is further specified in prospect theory (cf. Sect. 2.2.2.2.1).

  10. 10.

    The role of satisficing for switching between different modes of action is specified in the Carnegie concept (cf. Sect. 2.2.2.2.3).

  11. 11.

    For further analysis of this heuristic cf. the contribution of Chaps. 7 and 8.

  12. 12.

    Skepticism about robustness is further backed by the fact that most of the findings are based on experiments in which not decision of experts but rather decisions of laymen being susceptible to the traps of anomalies are dominating (cf. Frey 2001, p. 23, 29).

  13. 13.

    Detecting anomalies is seen differently for firms and households: “Suppliers of goods and services (producers) experience lower profit when they act in an anomalous manner. This loss is relatively easy to observe, as it is formulated in monetary units. Survival in a competitive environment (market) is threated if the losses in profits are sizeable and happen over an extended period of time. In consumption activities, on the other hand, falling prey to an anomaly means that utility is lower than it would otherwise be, but the respective individual’s survival is unlikely to be threatened. The incentive to reduce consumption anomalies is therefore smaller than in the case of production anomalies.”(op. cit., p. 30) Considering the recent development especially in financial markets this optimism as regards the firm’s abilities to detect anomalies can be doubted.

  14. 14.

    ‘Habit’ is the notion used in sociology and is meant to include a wide range of social and cultural explanantia; ‘routine’ is the notion used in economics and is more focused on the activity under consideration. Verplanken and Aarts (1999, p. 125) characterize habitual modes of action as the “enduring ‘default’ mode of the mind”.

  15. 15.

    From the perspective of an investor Keynes (1974, p. 147) has analyzed the intricate problem of building an expectation about the others’ doing by using the beauty contest metaphor.

  16. 16.

    Hence these motives are considered as a source for solving common resource dilemmas (cf. Chap. 5 of this book).

  17. 17.

    In cooperation games the reciprocity strategy called “Tit-for-tat” (start with cooperation and then imitate the last behavior of partners) has been proven to be very successful (Axelrod 1984; Gigerenzer and Brighton 2011, p. 17).

  18. 18.

    These conditions are not given in the case of many environmental goods and services.

  19. 19.

    Suppressing something that would be done is essentially different from enforcing something that wouldn’t be done.

  20. 20.

    Fehr and Falk (2002) only take multiple equilibria into account (op. cit., p. 707). Depending on the shape of the reaction function (depicting the individual compliance as a function of the believed compliance of others) also cyclical and even chaotic patterns can be included.

  21. 21.

    Due to this specific role of competence, Fehr and Falk (2002, 713ff) argue that motivational crowding out should be confined to incentive effects for fulfilling ambitious tasks and that this should not be confused with uncertainty and interactive effects dealt with in Sect. 2.2.2.1.3.

  22. 22.

    Standard incentives can constrain autonomy and competence in two different ways: firstly, by increasing the task burden and secondly, by reducing the options for fulfilling a task. In both cases frustration and choking effects are possible.

  23. 23.

    The possibility of an inverse relation between incentive and compliance is specific for this motivational affect. Such an effect can be modelled by using an enhanced utility function. Sorting the attractiveness of decisions by way of such an enhanced utility function encompass not only the usual pay-offs but also attitudes and individual image depending on mainly on intrinsic and extrinsic motivation (cf. Bénabou and Tirole 2006; Gneezy et al. 2011).

  24. 24.

    Cf. Sects. 2.2.3 and 2.5.2.

  25. 25.

    Nevertheless prospect theory has been critisized due to the remaining similarities to SEU and its informational implications: “Both prospect theory and expected utility theory suffer from the shortcoming of assuming that risky choice always emerges from a process of weighting and averaging (i.e. integration) of all relevant pieces of information.” (Berg and Gigerenzer 2010, p. 6)

  26. 26.

    In this concept ‘rationality’ is still defined in accordance with the standard concept.

  27. 27.

    Multiple selfs and corresponding problems of self-control can be dealt with such an approach (cf. Thaler and Sunstein 2009, p. 42; Kahneman 2011, p. 377, 408).

  28. 28.

    Obviously it is supposed that the agent is endowed with such an evaluation capability for all the cognitive factors. In the work of Ajzen there is no specification of the properties of this individual evaluation capability (Is it complete? Is it stable? Is it consistent?).

  29. 29.

    Because the explanandum of this approach is conceptualized in a quantitative manner in principle there is no obstacle against including the comparison of different options; but given more than one option a discrimination procedure would have to be specified.

  30. 30.

    Obviously there is only a narrow scope for integrating modes of action based on automaticity into the Ajzen approach. Ajzen himself (1991, p. 203) suggested that in the case of a very low level of subjective control (few elements of control with a low influence on behavior) intentions do not determine behavior. Rather in this case there is a direct influence of the strong constraints on the resulting behavior. This kind of automaticity urged by the situation-specific circumstances is different from a ‘learned’ automaticity as a way of getting rid of intention.

  31. 31.

    Another option for generating compliant behavior is monitoring although the latter may include some transaction cost.

  32. 32.

    Non-standard incentives such as propagating second order behavioral recipes (nudging) in such situations are recommended by Gneezy et al. (2011) and Kamenica (2012).

  33. 33.

    Though there is no reference to a specific behavioural effect it shall be mentioned here that experiments with different forms of auctions for allowances have shown a significant influence of these forms on the prices of these allowances and the revenues derived therefrom (cf. Reeson and Nolles 2009, p. 14; Porter et al. 2009).

  34. 34.

    A further elaboration of this approach is documented in this book (Part IV, Chap. 12).

  35. 35.

    If the decision is shaped by reference points, traditional incentives might backfire (cf. Kamenica 2012) because any incentive in favor of changing a reference option runs the risk of loss, the aversion against which is significantly higher that the desire for possible gains. Non-standard incentives such as making the reference point related options less attractive and/or reducing transition costs between options seem to be more promising in such a situation.

  36. 36.

    Cf. Chap. 7.

  37. 37.

    For such an intrinsic motivation it is not necessary that an observable state of the environment can be reliably attributed to the motivated behavior; it is sufficient that there is a belief that the individual behavior is a contribution to environmental improvement.

  38. 38.

    Furthermore there should be mention a case study about the effects of compensating for the willingness to accept a radioactive nuclear waste repository (Frey 2001, p. 73) in which a crowding out of ‘public spirit’ by offering financial compensation can be observed on a first stage. Increasing the financial compensation beyond a critical threshold re-establishes the normal constellation of a positive relation of incentive and acceptance in a second stage (similar to Fig. 2.9).

  39. 39.

    These findings correspond to postulates to increase the importance of commitment (Tomer and Sadler 2007) and trust (Lange and Gouldson 2010) in environmental regulation. These findings as well as postulates have to be confronted with the mixed experience made with voluntary agreements in European environmental policy.

  40. 40.

    The potential for nudges depends on the type of decision to make. This potential is the higher

    • the larger the time horizon (the higher the degree of inter-temporality),

    • the higher the difficulty of the task to decide upon,

    • the lower the frequency of the upcoming decision,

    • the less feedback is available for the decision maker (Thaler and Sunstein 2009, passim).

  41. 41.

    Further assessments of the concept of nudging can be found in Berg and Gigerenzer (2010), Wilkinson (2013), White (2013), Qizilbash (2012).

  42. 42.

    RECAP stands for “Record, Evaluate, and Compare Alternative Prices” (ibid.)

  43. 43.

    This is similar to the “responsive regulation” suggested by Führ and Bizer (2007; Chap. 12).

  44. 44.

    Of special importance are blocking mechanisms in terms of information/knowledge and and/or in terms of thresholds for making accessible cost-reducing opportunities (e.g. difference in learning curves, sunk costs).

  45. 45.

    This is related to re-conceptualizing the policy process as a problem solving process mentioned in Sect. 2.5.1.

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Acknowledgment

Assistance of Maria Daskalakis, David Hofmann and Frank Thesing is gratefully acknowledged.

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  1. University of Kassel, Kassel, Germany

    Frank Beckenbach

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  1. Frank Beckenbach
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Correspondence to Frank Beckenbach .

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  1. FB 7, University of Kassel, Kassel, Germany

    Frank Beckenbach

  2. adelphi consult, Berlin, Germany

    Walter Kahlenborn

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Beckenbach, F. (2016). Innovative Behavioral Approaches to Analyze the Incentives of Environmental Instruments. In: Beckenbach, F., Kahlenborn, W. (eds) New Perspectives for Environmental Policies Through Behavioral Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-16793-0_2

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