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Utilization of Behavioral Economics in Policy Implementation

Kijung Ahn · Jinhak Lee

Behavioral economics, which analyzes economic phenomena based on psychology, has been paid worldwide attention since the psychologist Daniel Kahneman in 2002 and economist Richard Thaler in 2017 won the Nobel Prize in economics. Furthermore many developed contries, for example U.S. and U.K. has been adopting the Behavioral economics in establishing and enacting the policies. 
In this study, we conducted experiments to find ways to apply the theory of behavioral economics to the Seoul city policy. The main results of this study are as follow.
Firstly, poor social proof may act as an obstacle rather than incentive in invoking the participation to policy. Social proof may be powerful incentive to participation in policy when people are in the situation of pluralistic ignorance. 
Secondly, usage of loss aversion disposition of people should be policy instrument to promote the municipal policy and to invoke the participation of citizen. As it is predicted in prospect theory of behavioral economics, people are very sensitive to loss(cost) rather than gain(benefit).
Thirdly, frame effect which means the choice of people depends on the context of proposal could be also powerful policy instrument when it is related to personal economic gain or loss, but it could be not effective when it is related to social gain or loss. 
Fourthly, policy instruments based on the behavioral economics could be more cost effective than those based on standard neo-classical economics, which means the benefit-cost(B/C) analysis of the former is better than the latter as shown in the experiment of this study. 
Fifthly, people consider the fairness in judging whether the policy is acceptable or not, especially when goods and service are provided by public sector. Thus when adjustment or increase of the charges for public service is needed, public provider should open the information of cost of provision and should emphasize on the necessity of such adjustment or increase.
Lastly, policy make should bear in minds that policy prescription based on behavioral economics is heuristic rather than algorithm. Thus many of experiments should be conducted before a policy is set up and exacted as the case of Behavioral Insight Team in U.K. And more fiscal and manpower support is needed to conduct the such experiments.