Behavioral Economics and Government Purchases – Some Insights into the Fiscal Psychology of Public Expenditure
As a challenge to the neoclassical approach to human decision-making, behavioral economics have obtained increasing acceptance either in the field of public finance for some time. How-ever, so far the fundamental results of behavioral economics on cognitive heuristics, illusions and biases with respect to human information processes, judgements and choices were pri-marily applied to the analysis of taxation and public debt. In contrast, comparable examinations of public expenditure are not very common up to now. For this reason, the paper gives a review of the existing behavioral economic research on public spending and governmental expenditure policy.
Behavioral Economics and Government Purchases – Some Insights into the Fiscal Psychology of Public Expenditure
Behavioral economics has obtained increased acceptance in the field of public finance, thus challenging the neoclassical approach to human decision-making. However, so far the fundamental results of behavioral economics on cognitive heuristics, illusions, and biases with respect to human information processes, judgments and choices were primarily applied to the analysis of taxation and public debt. In contrast, up to now comparable examinations of public expenditure are not very common. To address this shortcoming, the paper offers a review of the existing behavioral economic research on public spending and government expenditure policy.
___
- Abramson, L.Y., Seligman, M.E. & Teasdale, J.D. (1978). Learned Helplessness in Humans – Cri-tique and Reformulation. In: Journal of Abnormal and Social Psychology, Vol. 87, 49-74.
- Akerlof, G.A. & Shiller, R.J. (2009). Animal Spirits – How Human Psychology Drives the Economy, and Why It Matters for Clobal Capitalism, Princeton.
- Ariely, D. & Wertenbroch, K. (2002). Procrastination, Deadlines, and Performance – Self-Control by Precommitment. In: Psychological Science, Vol. 13, 219-224.
- Bailey, S. & Connolly, S. (1989). The Flypaper Effect – Identifying Areas for further Research. In: Public Choice, Vol. 95, 335-361.
- Baron, J. & McCaffery, E.J. (2008). Starving the Beast – The Political Psychology of Budget Defi-cits. In: Garrett, E., Graddy, E. & H.E. Jackson (Ed.). Fiscal Challenges – An Interdisciplinary Approach to Budget Policy, Cambridge, 221-241.
- Beaulier, S. & Caplan, B. (2007). Behavioral Economics and Perverse Effects of the Welfare State. In: Kyklos, Vol. 60, 485-507.
- Bernheim, B.D. & Rangel, A. (2007). Behavioral Public Economics: Welfare and Policy Analysis with Nonstandard Decision Makers. In: Diamond P. & H. Vartiainen (Ed.). Behavioral Economics and its Applications, Princeton, 7-77.
- Bettman, J.R., Luce, M.F. & Payne, J.W. (1998). Constructive Consumer Choice Processes. In: Journal of Consumer Research, Vol. 25, 187-217.
- Bewley, T.F. (2004). Fairness, Reciprocity and Wage Rigidity. IZA Discussion Paper 1137, Bonn.
- Bolton, G.E. & Ockenfels, A. (2000). ERC – A Theory of Equity, Reciprocity, and Competition. In: American Economic Review, Vol. 90, 166-193.
- Brickman, P., Coates, D. & Janoff-Bulman, R. (1978). Lottery Winners and Accident Victims – Is Happiness Relative? In: Journal of Personality and Social Psychology, Vol. 36, 917-927.
- Buchanan, J.M. & Wagner, R.E. (1977). Democracies in Deficit, New York.
- Buchanan, J.M. (1967). Public Finance in Democratic Process, Chapel Hill.
- Camerer, C.F. & Loewenstein, G.F. (2004). Behavioral Economics: Past, Present, Future. In: Camerer, C.F., Loewenstein, G.F. & M. Rabin (Ed.). Advances in Behavioral Economics, New York, 3-51.
- Caplan, B. (2007). The Myth of the Rational Voter – Why Democracies Choose Bad Policies. Cato Institute Policy Analysis Series, No. 594 (May 29, 2007).
- Charness, G., Masclet, D. & Villeval, M.C. (2013). The Dark Side of Competition for Status. In: Management Science, Vol. 60, 38-55.
- Chong, D. & Druckman, J.M. (2007). Framing Public Opinion in Competitive Democracies. In: American Political Science Review, Vol. 101, 637-655.
- Clark, A.E., Kristensen, N. & Westergard-Nielsen, N. (2009). Economic Satisfaction and Income Rank in Small Neighbourhoods. In: Journal of the European Economic Association, Vol. 7, 519-527.
- Congdon, W.J., Kling, J.R. & Mullainathan, S. (2011). Policy and Choice: Public Finance through the Lens of Behavioral Economics, Washington (DC).
- Conlisk, J. (1996): Why Bounded Rationality? In: Journal of Economic Literature, Vol. 34, 669-700.
- Cooper, J.C. & Kovacic, W.E. (2012). Behavioral Economics – Implications for Regulatory Behavior. In: Journal of Regulatory Economics, Vol. 41, 41-58.
- Cotè, S., House, J. & Willer, R. (2015). High Economic Inequality Leads Higher-Income Individuals to be Less Generous. In: Proceedings of the National Academy of Sciences of the United States of America (PNAS), Vol. 112, 15838-15843.
- Courant, P., Gramlich, E. & Rubinfeld, D. (1979). The Stimulative Effects of Intergovernmental Grants – Or Why Money Sticks Where It Hits. In: Mieszkowski, P. & W. Oakland (Hrsg.). Fiscal Federalism and Grants in Aid, Washington (DC), 5-21.
- Cruces, G., Truglia, R.P. & Tetaz, M. (2011). Biased Perception of Income Distribution and Pref-erences for Redistribution – Evidence from Survey Experiment. IZA Discussion Paper 5699. Bonn.
- DellaVigna, S. (2009). Psychology and Economics. In: Journal of Economic Literature, Vol. 47, 315-372.
- Dollery, B.E. & Worthington, A.C. (1999). Fiscal Illusion at the Local Level – An Empirical Test Using Australian Municipal Data. In: Economic Record, Vol. 75, 37-48.
- Döring, T. & Oehmke, R.D. (2019). About the Economic Psychology of Public Debt, In: Intereconomics, Vol. 54, 297-303.
- Downs, A. (1960). Why the Government Budget is too small in a Democracy. In: World Politics, Vol. 12, 541-563.
- Elster, J. (1998). Emotions and Economic Theory. In: Journal of Economic Literature, Vol. 36, 47-74.
- Falk, A., Fehr, E. & Zehnder, C. (2006). Fairness Perception and Reservation Wages – The Behavioral Effects of Minimum Wages Law. In: The Quarterly Journal of Economics, Vol. 121, 1347-1381.
- Fehr, E. & Schmidt, K.M. (1999). A Theory of Fairness, Competition and Cooperation. In: Quarterly Journal of Economics, Vol. 114, 817-868.
- Fernbach, P.M., Rogers, T., Fox, C.R. & Sloman, S.A. (2013). Political Extremism Is Supported by an Illusion of Understanding. In: Psychological Science, Vol. 24, 939-946.
- Ferrer-i-Carbonell, A. (2005). Income and Well-Being – An Empirical Analysis of the Comparison Income Effect. In: Journal of Public Economics, Vol. 89, 997-1019.
- Frey, B.S. & Eichenberger R. (1991). Anomalies in Political Economy. In: Public Choice, Vol. 68, 71-89.
- Glaeser, E.L. (2003), Psychology and the Market, Harvard Institute of Economic Research, Discussion Paper, No. 2023 (December 2003).
- Grund, Ch. & Sliwka, D. (2007). Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction – Theory and Evidence. In: Journal of Institutional and Theoretical Economics, Vol. 163, 313-335.
- Güth, W., Schmittberger, R. & Schwarze, B. (1982). An Experimental Analysis of Ultimatum Bargaining. In: Journal of Economic Behavior and Organization, Vol. 3, 367-388.
- Hamlin, A. & Jennings, C. (2011). Expressive Political Behaviour – Foundations, Scope and Implications. In: British Journal of Political Science, Vol. 41, 645-670.
- Hammes, D.L. & Wills, D.T. (1987). Fiscal Illusion and the Grantor Government in Canada. In: Western Economic Association International, Vol. 25, 707-713.
- Henrich, J., Boyd, R., Bowles, S., Camerer, C., Fehr, E. & Gintis, H. (2004). Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies, Oxford.
- Hillman, A.L. (2010). Expressive Behavior in Economics and Politics. In: European Journal of Political Economy, Vol. 26, 403-418.
- Hines, J. & Thaler, R. (1995). Anomalies – The Flypaper Effect. In: Journal of Economic Perspectives, Vol. 9, 217-226.
- Jolls, Ch., Sunstein, C.R. & Thaler, R. (1998). A Behavioral Approach to Law and Economics, In: Stanford Law Review, Vol. 50, 1471-1550.
- Jones, P. & Hudson, J. (2000). Civic Duty and Expressive Voting – Is Virtue its own Reward? In: Kyklos, Vol. 53, 3-16.
- Kahneman, D. & Tversky, A. (1979). Prospect Theory – An Analysis of Decision under Risk. In: Econometrica, Vol. 47, 263-291.
- Kahneman, D. & Tversky, A. (1984). Choices, Values and Frames. In: American Psychologist, Vol. 39, 341-350.
- Kahneman, D. & Tversky, A. (1992). Advances in Prospect Theory – Cumulative Representation of Uncertainty. In: Journal of Risk and Uncertainty, Vol. 5, 297-323.
- Kahneman, D. (2003). Maps of Bounded Rationality: Psychology for Behavioral Economics. In: American Economic Review, Vol. 93, 1449-1475.
- Kahneman, D. (2011): Thinking, Fast and Slow, London.
- Kahneman, D., Knetsch, J.L. & Thaler, R. (1991). Anomalies – The Endowment Effect, Loss Aver-sion and Status Quo Bias. In: Journal of Economic Perspectives, Vol. 5, 193-206.
- Keynes, J.M. (1936). The General Theory of Employment, Interest, and Money, London.
- Kilavuz, F. & Yüksel, C. (2019). Psychological and Sociological Factors Weakening Public Budget Awareness. In: International Journal of Public Finance, Vol. 4 (2), 127-144.
- Kirchler, E. (1997). Balance between Giving and Receiving – Tax Morality and Satisfaction with Fiscal Policy as They Relate to the Perceived Just Distribution of Public Resources. In: International Journal of Economic Studies, Vol. 5, 59-70.
- Kirchler, E. (1999). Reactance to Taxation – Employers’ Attitudes toward Taxes. In: Journal of Socio Economics, Vol. 28, 131-138.
- Kirchler, E. (2007). The Economic Psychology of Tax Behaviour, Cambridge.
- Kuran, T. & Sunstein, C. (1999). Availability Cascades and Risk Regulation. In: Stanford Law Review, Vol. 51, 683-768.
- Kuran, T. (1991). Cognitive Limitations and Preference Evolution. In: Journal of Institutional and Theoretical Economics, Vol. 147, 241-273.
- Kurtz, J.L. (2008). Looking at the Future to Appreciate the Present – The Benefits of Perceived Temporary Scarcity. In: Psychological Science, Vol. 19, 1238-1241.
- Layard, R. (2005). Happiness – Lessons from a New Science, New York.
- Lewis, A. (1983). Public Expenditures – Perceptions and Preferences. In: Journal of Economic Psychology, Vol. 3, 159-167.
- Linville, P.W. (1985). Self-Complexity and Affective Extremity – Don’t Put All of Yours Eggs in One Cognitive Basket. In: Social Cognition, Vol. 3, 94-120.
- Mankiw, N.G. (2018). Macroeconomics, 10th Edition, Basingstoke and New York.
- Milkman, K.L., Mazza, M.C., Shu, L.L., Tsay, C.-J. & Bazerman, M. (2012). Policy Bundling to Overcome Loss Aversion – A method for Improving Legislative Outcome. In: Organizational Behavior and Human Decision Processes, Vol. 117, 158-167.
- Mullainathan, S. & Shafir, E. (2013). Scarcity – Why Having Too Little Means So Much, New York.
- Mullainathan, S., Schwartzstein, J. & Congdon, W.J. (2012). A Reduced-Form Approach to Be-havioral Public Finance. In: Annual Review of Economics, Vol. 4, 511-540.
- Oates, W.E. (1979). Lump-Sum Intergovernmental Grants Have Price Effects. In: Mieszkowski, P. & W. Oakland (Hrsg.). Fiscal Federalism and Grants in Aid, Washington (DC), 23-30.
- Oates, W.E. (1988). On the Nature and Measurement of Fiscal Illusion: A Survey. In: Brennan, G., Grewel, B.S. & P. Groenwegen (Ed.). Taxation and Fiscal Federalism, Sydney, 65-82.
- Payne, J.W., Bettman, J.R. & Johnson, E.J. (1992). Behavioral Decision Research: A Constructive Processing Perspective. In: Annual Review of Psychology, Vol. 43, 87-131.
- Peacock, A.T. & Wiseman, J. (1961). The Growth of Public Expenditure in the United Kingdom, Princeton.
- Praag, B.M.S.von & Frijters, P. (1999). The Measurement of Welfare and Well-Being – The Leyden Approach. In: Kahneman, D., Diener, E. & N. Schwarz (Ed.). Well-Being – The Founda-tions of Hedonic Psychology, New York, 413-433.
- Quattrone, G.A. & Tversky, A. (1988). Contrasting Rational and Psychological Analysis of Political Choice. In: American Political Science Review, Vol. 82, 719-736.
- Rabin, M. (1993). Incorporating Fairness into Game Theory and Economics. In: American Economic Review, Vol. 83, 1281-1302.
- Rabin, M. (1998). Psychology and Economics. In: Journal of Economic Literature, Vol. 36, 11-46.
- Roemer, J.E. & Silvestre, J. (2005). The ‚Flypaper Effect‘ is not an Anomaly. Cowles Foundation Paper 1113, New Haven.
- Schmölders, G. (1960). Das Irrationale in der öffentlichen Finanzwirtschaft – Probleme der Finanzpsychologie. Hamburg.
- Schmölders, G. (1970). Finanz- und Steuerpsychologie. Hamburg.
- Schnellenbach, J. & Schubert, C. (2015). Behavioral Political Economy: A Survey. In: European Journal of Political Economy, Vol. 40, 395-417.
- Seligman, M.E. (1975). Helplessness – On Depression, Development and Death, San Francisco.
- Smith, V.L. (2005). Behavioral Economics Research and the Foundations of Economics. In: Journal of Socio-Economics, Vol. 34, 35-150.
- Smith, V.L. (2008). Rationality in Economics, New York.
- Spicer, M.W. & Lundstedt, S.B. (1975). A Reexamination of Taxpayer Behavior, Columbus.
- Thaler, R. (1985). Toward A Positive Theory of Consumer Choice. In: Journal of Economic Behavior and Organization, Vol. 1, 39-60.
- Thaler, R. (1988). Anomalies – The Ultimatum Game. In: Journal of Economic Perspectives, Vol. 2, 195-206.
- Thaler, R.H. & Sunstein, C.R. (2009). Nudge – Improving Decisions about Health, Wealth and Happiness, New York et al.
- Tompkinson, P. & Bethwaite, J. (1991). The Effect of Information on Fiscal Perception. In: Journal of Economic Psychology, Vol. 12, 287-298.
- Tyran, J.-R. (2004). Voting when Money and Morals Conflict – An Experimental Test of Expres-sive Voting. In: Journal of Public Economics, Vol. 88, 1645-1664.
- Variyam, J.M. & Jordan, J.L. (1991). Economic Perceptions and Agricultural Policy Preferences. In: Western Journal of Agricultural Economics, Vol. 16, 304-314.
- Wildasin, D.E. (1990). Budgetary Pressures in the EEC – A Fiscal Federalism Perspective. In: American Economic Review, Vol. 80, 69-74.
- Wildavsky, A. (1964). The Politics of the Budgetary Process, Boston.
- Wood, W. & Neal, D.T. (2007). A New Look at Habits and the Habit-Goal Interface. In: Psychological Review, Vol. 114, 843-863.
- Wortmann, C.B. & Brehm, J.W. (1975). Responses to Uncontrollable Outcomes – An Integration of Reactance Theory and the Learned Helplessness Model. In: Berkowitz, L. (Ed.). Advances in Experimental Social Psychology, Vol. 8, New York and London, 277-336.
- Wyckoff, P.G. (1991). The Elusive Flypaper Effect. In: Journal of Urban Economics, Vol. 30, 310-328.