November 15, 2013

Internalities, habit formation and healthy individuals

Healthy Habits: Some Thoughts on The Role Of Public Policy in Healthful Eating and Exercise Under Limited Rationality

Selected statements from a chapter of new book presented recently: Behavioral Public Policy, a must read.

About unhealthy habits:
Neither self-control problems per se nor naivety about future self-control problems necessarily lead to special mistakes in light of habit formation. People over-indulge in un-healthful behaviors because of self-control problems. But it is primarily the unhealthfulness per se not the habit component that causes the problem. Self-control problems predict that people overconsume unhealthy goods and activities, but by themselves there is no simple prediction that overconsumption is worse for habit-forming goods than for non-habit-forming goods.
First, unless we believe that it is likely that people are making mistakes, the fact that some activities are habit forming does not (in any way that I can understand) heighten the case for policy intervention, regulation, or paternalism. Second, if we decide we'd like to deter some activity, we should never forget the power of prices. The most practical policy we may employ if we reach the conclusion that people are doing too much of bad habits or too little of good habits: tax or otherwise deter the bad habits, and subsidize or otherwise support the good habits. If we want to get people to do less unhealthy eating, we should make it more costly; if we want people to do more exercise, we ought to make it cheaper
Tool, a life cycle adjusted taxes on unhealthy behavior:
Instead of (say) 10% tax on unhealthy items for a persons entire life, consider heavy taxes for young people for these items, and no taxes when older, in a way calculated to leave the total tax burden the same overall if people do not change their behavior. What would happen, according to di§erent theories of motivation? If young people are acting according to fully rational models, fully realizing the habits they are forming and the costs they are incurring, then they will be made no worse off. Indeed, there is a behavioral prediction of the rational model: they will either keep consuming a lot in their youth and in their adulthood just like they did before, or they will stop in their youth and then start in their adulthood. But either way, economic theory based on full rationality says they will be just as well as before. How might people who have self-control problems or projection bias behave? The prediction is that they are very likely to decrease consumption dramatically both in their youth and thereafter. This is because the prediction of these alternative models is that those who were forming these habits when young (at least the ones who were close to indi§erent before) were not planning to do so. If people don't realize they will develop a lifelong habit as strong as they will, then they never thought they were going to pay taxes later in life just because of early consumption.
Wether this is possible to apply remains uncertain. I suggest looking at Acemoglu-Robinson paper to shed some light.