Soft Paternalism

April 8, 2006

An article in The Economist this week, The state is looking after you describes a growing trend in public policy deemed “soft paternalism”—designing policies that gently lead people to make better decisions as opposed to outright bans on certain behaviors (e.g., public smoking bans or requiring drivers to buy auto insurance). The basic premise is that “correct” decisions are sometimes harder to make than “incorrect” ones. It takes effort on the part of individuals to learn about and enroll in their pension plans so many simply don’t enroll. This is not quite the same as deciding not to enroll–it is simply easier not to make a choice and be content with the default option.

Soft paternalism asks, why not make the “right” decision the default while leaving the choice to opt-out available? Essentially, the idea is that even though we may know what the best decision is, we may need a credible third party to provide the incentives before we will rationally make that decision. Consider a smoker who knows he should stop smoking but cannot bring himself to quit. If he could pay someone to follow him around and punch him in the face if he lights up, he would probably quit. Unfortunately if this happened in practice, there may be a lawsuit and so economically speaking, the threat is not credible and the contract would not work. The smoker’s hired man may not actually follow through with his duty for fear of legal consequences.

This is where the state enters the picture. In certain circumstances it may be the only entity with absolute credibility to enforce the needed “punishments.” For example, it could provide “sin licenses” which allow one to purchase only a certain number of cigarettes per month, with this number determined in advance by the holder of the license and thus introducing an added cost to smoking without implementing an outright.

I had an interesting related conversation a few weeks ago about situations in which it may be beneficial to commit oneself to some contract which provides incentives to reinforce a desired behavior. For example, a gym could offer a yearly membership with a very expensive initial fee and a condition that each time the member works out for at least an hour (up to, say, three times per week), he receives a $20 cash refund. In this way, the member could enter into a contract which reinforces a behavior he knows to be beneficial at present but foresees being difficult to carry out in the future.

Private contracts are fine, but when the state becomes involved, there is always the potential for abuse. Could we trust the government to only “gently shape” behaviors that are in our own interest? As the article correctly points out, this approach is clearly better than “hard paternalism” (i.e., unconditional prohibition) but leaves too much room for the state to determine which ends are “unarguably good.” Nevertheless, these sorts of situations pose very interesting questions for economics, game theory, and the idea of rationality.