Optimal Prosocial Nudging

Abstract

Nudges are no longer just used to fix internalities, but can be used to take advantage of individuals’ bounded rationality, and through a change in the choice architecture, affect behavior so that negative externalities are reduced. While we are gaining more and more insights into when and how nudges work, much less attention has been put on nudge as a standard policy instrument. What is the socially optimally use of nudging, what are the trade-offs between standard policy instruments such as environmental taxes and nudges, and are standard instruments and nudges even complements and not substitutes? In this paper we investigate optimal prosocial nudging under a number of different settings. We find that under fairly general settings, nudge would only play a limited role as long as optimal taxes can be implemented. Moral nudges are more likely to play a role even when the tax is optimal.