Monday, March 29, 2010

Pricing and behavioral economics

I'm currently making my way through Easterly and Cohen's edited volume What Works in Development: Thinking Big and Thinking Small; all the chapters I've read have been excellent so far. One that struck me was Michael Kremer and Alaka Holla's survey of the literature on the impact of different approaches to pricing in health and education projects (ungated version here). They note that a remarkably consistent finding is that when you go from a zero to non-zero cost or reward, there is a large difference in uptake. So, for example, people are much less likely to participate in an education program or use an anti-malarial impregnated bednet if you charge them a small fee rather than giving it to them for free. That's not surprising, of course, but what is surprising is that the size of the fee tends to be much less important than whether or not there is a fee at all. This isn't what economic theory would predict- people should place a certain value on something like an anti-malarial bednet, and be willing to pay for it as long as it's offered to them at a price that's less than that. There should not be very many people who actually value it enough to use it if you give it to them, but not enough to pay even a tiny price for it. Yet, it turns out there are.

This is an example of behavioral economics, i.e., loooking at how peoples' psychological biases lead them to deviate from the standard assumptions of economic theory. Usually, research along these lines picks a particular deviation- often one that has been identified empirically, such as that people are impatient about something- and offers an ad hoc theory based on incorporating this into a model of utility maximization. This is certainly a worthwhile approach that has led to some very interesting work.

One of my half-formed, pet ideas is that it would be great to approach this from the other way around, from the standpoint of evolutionary psychology. One could build a broader theoretical framework based on evolutionary psychology that could yield more systematic predictions that could be tested empirically. This would give us a complementary and potentially useful way to look at these things in addition to narrower adaptations of economic theory in stemming from observed empirical regularities.

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