For those who don’t like video and just want to read the text, it can be found below.

[Gulnara]

On a recent trip to my beautician – link to her website below – I started negotiating the price of my visit. However, I quickly caught myself doing so and stopped. She understood where I was coming from, as she is also from the former Soviet Union, where such haggling is a normal part of daily life. But that isn’t the case in a country like New Zealand – which is why we both put a stop to it.

So why is haggling culture so different in different countries, and what are the economic consequences of this?

[Matt]

That is really interesting Gulnara. Such bargaining does depend on the expectations of consumers and producers – so bargaining cultures will tend to support individuals bargaining while societies that do not do that will make it costly.

This strategic complementarity implies that both societies with bargaining and those without are “equilibrium” outcomes – where people’s incentive is to do what everyone else is doing. We call these bargaining and non-bargaining equilibrium “states of the world”.

To evaluate these outcomes, we want to think more deeply about price setting and market structure within each of these states. Then we can posit ways to test this with data, and also think about how differences in the data between countries may be due to the acceptance of bargaining.

The two mechanisms we will focus on here are price discrimation and tacit collusion and price discovery.

Price discrimination

Retail stores tend to be monopolistically competitive – especially at the stage where you have already turned up at the store ready to purchase. 

When you are at a store and ready to purchase you have three options:  Don’t purchase, purchase at the ticket price, and haggling.  In the face of haggling the store has its own incentive to haggle back – or to tell you to get bent.

The willingness to haggle on both the customer’s and the firm’s behalf depends on whether it is something they expect other people to do – it feels pretty stink to go and haggle just for the other person, and other customers, to look down their nose at you. However, this is more than just some concern about underlying social judgment – the act of haggling is something the firm would like to be prepared for, and the act of undertaking haggling puts pressure on these other customers to take on the cost of haggling themselves.

This can all be articulated through the concept of price discrimination.

Price discrimination is an interesting issue. A big reason why we viscerally feel uncomfortable with it is because it is discrimination – two people are being charged a different amount for exactly the same product!  This seems fundamentally unfair.

In this haggling case, such discrimination doesn’t work by having a price and marking it up for some and down for others.  Firms, in the face of bargaining, will increase the ticket price relative to a situation without bargaining.  This will make it necessary for customers to negotiate simply to receive the price they would receive in the absence of such bargaining. 

As a result, if you are not equipped to bargain, you end up paying higher prices – and if you aren’t able to negotiate much, this may be due to it being costly for you to negotiate, making the “real price” paid high.

However, there are those that benefit. Customers that are able to buy who wouldn’t have been able to at the non-price discrimination price, those with a low willingness to pay (or low cost for bargaining) will experience lower prices, and the business is able to increase their profits. Overall it might be more economically efficient, depending on how costly haggling is to individuals, but there may be distributional concerns.

If the industry is fully monopolistically competitive, low entry barriers will see the increase in business profits evaporate – so the increase in sales will lead to an increase in benefits to consumers on average, although at the cost of customers who have a high willingness to pay/low willingness to bargain. Furthermore, such entry may lead to excessive product variety as noted in Li and Shuai (2019) Monopolistic competition, price discrimination and welfare – ScienceDirect.

The mixture of price discrimination and search costs doesn’t just hold in the abstract. Bryne, Martin, and Nah (2019) (negotiation_v18.pdf (nyu.edu)) is a recent example of a field experiment testing out this behaviour and its implications. However, these implications and what we think about them does depend on the reason why “willingness to pay” is high and why “search costs” or “the cost of bargaining” may be high.

If it was just on the basis of individuals initial income, this may be quite redistributive – increasing provision of the product  and the welfare of low income individuals.  However, if it was due to the necessity of provision to meet minimum standards (i.e. health care expenses) such bargaining may be quite regressive.

Gulnara, you’ve actually experienced life with bargaining and life without – why don’t you tell us your thoughts.

[Gulnara]

Thanks Matt.

When I was a teenager I was still getting used to being able to shop for myself. At the time I didn’t really understand haggling, and as a result I found it quite exhausting. 

I specifically remember going and purchasing sunglasses from a store in Baku, that I thought looked very cool. 

I went home with them, and my mom asked me how much they cost – I told her and she inquired whether I had managed to get a discount.  When I told her I just paid the ticket price, she laughed and took me back to the store, haggling with them for a discount to be paid back to me. The point of the lesson was to indicate that even if you were willing to pay for a given product, prices had been inflated – and so bargaining was expected.

As I got older, bargaining was active in certain situations – and it became more natural and less costly for me.  Haggling with doctors for medical treatment and check-ups was extremely common, and once I left Azerbaijan to study in Italy, there were constant situations where bargaining was necessary – and expected – to live on my limited student budget.

Tacit collusion and price discovery

[Gulnara]

Now I’d like to change tack a little bit. Although bargaining may be a tool for price discrimination, it also influences the nature of competition in the market.

We recently talked about tacit collusion when chatting about Nurofen prices. Furthermore, an understanding of tacit collusion helps us to understand economic cycles and the recent discussion about price freezes – something we’ve blogged on.

What does this have to do with tacit collusion?  Well when comparing the Rotemberg and Saloner model to the Green and Porter model we noted that a major issue was that of “information”.  Can a firm tell whether their competitors are to blame for changing prices?

If, instead of monopolistic competition, we had firms that were oligopolistic then these strategic interactions become important for the general level of price setting.

Having bargaining, offers an “unobservable” way to cut or increase prices. As a result, your firm’s competitors may be able to observe the ticket price on what you sell – but they cannot observe the full complexity of how you will discount to attract customers.

This view of collusion and bargaining implies two things.

Firstly, with less information about the price set by the other firm, the Green and Porter model – where there are price wars in low demand states – becomes a more believable representation of price setting.  As a result, pricing dynamics over the economic cycle may look quite different in countries with significant consumer bargaining.

Secondly, as it is harder to observe the other businesses’ prices and build up trust for collusion,  it is more difficult for firms to collude!  In countries where bargaining does not occur, firms can loudly commit to a certain level of prices, and thereby find ways to tacitly collude and keep prices higher.  

As a result, profit margins and prices would be higher in countries where bargaining is culturally uncomfortable – countries like New Zealand, Australia, and the United Kingdom.  These example countries are fairly well known for being “expensive” to live in – so consumer bargaining may be one possible explanation.  However, this is an issue we are going to discuss more deeply another time.

Conclusion

To sum up, with price discrimation and tacit collusion, we’ve outlined two of the possible mechanisms that may differentiate market outcomes in countries with active market bargaining and those without.  Both of these arguments appeared to show bargaining in a favourable light – however, they also did point to trade-offs that may reverse this, namely the cost of bargaining, the proliferation of excess product variety, and broader related distributional consequences.

However, there are other possible arguments that can come to mind.  If you have some alternatives of your own, why don’t you pop them down in the comments for us all to discuss!

Thanks for watching and we’ll see you next time.

The core point is that people get buyer’s remorse when choices are reversible and become increasingly unhappy with their decision. When choices are irreversible, endowment effects kick in and they become happier with their choice over time. Importantly, most people do not realise that this effect exists.

• Does this have implications for choice architecture? Would it be beneficial to make some choices irreversible to increase the utility gained from them?
• If people are unaware of the effect, will they under-utilise commitment mechanisms that make decisions irreversible?

Discussions of behavioural work among economists usually revolve around whether the discovered heuristic or deviation from ‘perfect rationality’ is policy relevant. They argue over whether it requires a policy intervention and whether an intervention would increase welfare from the individual’s perspective. Chetty bypasses that discussion to demonstrate how understanding of people’s biases can help the Government to control their actions.

For example, when he talks about changing defaults to encourage saving he takes it as given that it is a worthwhile objective of policy. He’d have no argument from me that improving outcomes for the least cost is worthwhile, but assuming that saving rates are too low begs the question. Why is it that people are saving too little? Are their behavioural biases truly a policy-relevant problem?

By decoupling the normative questions from the positive interventions, Chetty makes economics a tool for effective intervention rather than a tool for improving outcomes and individual welfare. I’m sure that’s very helpful for government analysts who know what they want but it is not the road to better policy. We’ve often talked on this blog about recognising normative assumptions implicit in policy decisions. But we say that to encourage debate about the right framework for considering them, not to sidestep them altogether. Chetty’s approach is undoubtedly useful and may be pragmatic but I can’t help feeling very uncomfortable about its amoral view of the world.

First off to answer this tweet:

@TVHE I love it when you call me names. Particularly ones I don't understand.

— Geoff Simmons (@geoffsimmonz) September 2, 2014

My comments were certainly not intended to be an insult – “extreme social constructivist” was equivalent to call of “perfect information” which both Gareth and Geoff throw out there fairly often (including at me).  I used this based on the near constant focus on how firms are “tricking” us, ergo shifting our preferences.  Given the theoretical construct being used to justify what was written is that firms are doing this I’m happy with the description I gave.

Potentially it was seen as insult as these issues are often painted as “positivists vs constructivists”.  Many in public health would see themselves as strongly, strongly, positivist – relying on data to estimate and falsify like a true science.  However, data alone can’t give us anything – we need a conception of theory.  A theory that relies strongly on firms and institutions setting people’s preferences IS constructivist.

This is why the positivist vs constructivist debate can be a bit of a red herring – hence why I follow a “scientific realist” view of economics and problem definition.  In this way, I don’t see constructivist as an insult – it is a type of framework that has value as long as we try to consider “many models”.  My preference is for methodological individualistic models instead – but this journey is a bit beside the point.

Think about the kids

Now the people commenting all asked whether I believed in a “rational choice model for kids”.  Of course I don’t, as I said:

Social constructivism does have a nugget of truth, and in the formative years of childhood there are important elements too it.  However, there are two key concerns.

And

First let me state down where our frameworks meet.  Advertising to and information for kids does matter.  We build up a stock of habits, rules of thumb, and physical attributes as children which have a fundamental impact on the type of life available to us as adults – and we are ill equipped to make choices for ourselves.  In that case we do need to think about these types of issues.

My concerns were about how we use the framework to analyse and think about choice – but like almost all economists I heavily appreciate these points around habit formation etc ESPECIALLY with regards to kids.

So I wasn’t saying that we shouldn’t consider these types of explanations – what was I saying then?  I was saying this shouldn’t be treated as our only explanation – and if we accept a “preference shifting” argument as an important part explanation that is fine.  But be aware it is a debate you need to be able to have, on reasonable terms (eg recognising alternative explanations and the difficulty of balancing evidence) – the shrill attack on kids toys at supermarkets comes off as extremism here!

Now I noticed in the comments that Geoff states they aren’t anti the toys – I’ve read the posts and media releases and there is a lot of harsh language in there, and a very anti-firm rhetoric that can only be explained through a social constructivist view of firm actions influencing individuals.  I can only answer the words that are put in front of me, and those words seemed relatively anti the program.

The discussion on choice and our “explanation of stylized facts”

When it comes to building an explanation, there is in fact a trade-off between an explanation from social constructivism and one from heterogeneity of choice.

If we see choices that differ from what we would choose we can explain these choices either with regard to different models.  The same “variability” can be explained by people wanting different things – the question then is, is this due to individuals inherently valuing things in a different way to us, or is it due to them being “tricked” into valuing things differently.

The answer to this question is a central point of contention, and my goal was to bring it out.  Especially given that each form of explanation has specific shortcomings – with constructivist models subject to multiple equilibrium with varying forms of value that may not be fully transparent.

By focusing too much on only a single explanation, we are inherently placing less weight on other explanations.  A key set of other explanations in this case involve “people being different”.  If we aren’t careful, such a bare focus will be implemented in policy and will restrict choices.

This is no small point, not in the slightest.  The fact that most of our actions are unconscious, that habit formation is key, and that even our costly attempts at conscious choice are bounded does not offer a slam dunk argument for the “firms are controlling your preferences” argument being thrown around.

Weak wills and time inconsistency

There is a feeling that time inconsistency in itself justifies action.  Of course it may – however, once again we are discussing a shifting “preference” as our explanation, implying that there are multiple explanations of our phenomenon with different policy recommendations depending on the one you pick!

Time inconsistency is especially intuitive though – which when it comes to “picking a model” this is sometimes a pretty important factor.  At a minimum it makes it persuasive.

But, if we pick time inconsistency we need to ask “why don’t people find costly ways to make themselves commit”.  Or if we go to use policy “how can we make it cheaper and more accessible to precommit?”.

This is an especially good concept as people can “self-select”.  If they are suffering from precommitment issues, then making it easier to precommit improves their lives.  If they are simply willing to trade-off future health more heavily than we are, then they won’t precommit and they’ll make choices.

Now we may say here “people are stupid, they’ll make choices outside their own interest”.  I’d ask us not to use the term stupid, and to again define and try to measure the ways people mess things up – the concept of help here is about working with people to improve their lives (as we can’t observe their preferences), not so much to decide what we think their preferences SHOULD be

These issues are relatively simple/obvious

There is no such thing as a simple or obvious issue in social sciences.  It is incredibly common for social scientists to call results obvious, trivial, or simple but it is a narrative I’ll fight till my last breath.

Social issues are far too important, and the inherent differences and depth of individuals too much, for any social “problem”/”issue” to deserve any of these terms.

Now I hate it when people just whip out rhetoric like “social constructivist” and don’t explain it – so what do I mean, how have they gone this way, and what do we know about this type of framework so we can analyse it?

Social constructivism

I like to get definitions off Wikipedia, and in this case this does a good job of articulating how I understand the concept:

Social constructivism is a sociological theory of knowledge that applies the general philosophical constructivism into social settings, wherein groups construct knowledge for one another, collaboratively creating a small culture of shared artifacts with shared meanings. When one is immersed within a culture of this sort, one is learning all the time about how to be a part of that culture on many levels. It is emphasised that culture plays a large role in the cognitive development of a person.

In combination with the economic framework that is used, both here and by GG, with their views on the unconscious mind have led to a situation where they increasingly use the word “trick” to mean “set our preferences.

As a result, it has become increasingly clear that whenever GG says the “food industry is tricking us”, it is just a rhetorical device for expressing the term “the food industry is setting our preferences in a way that we disagree with/believe is bad for the individual”.

Social constructivism does have a nugget of truth, and in the formative years of childhood there are important elements too it.  However, there are two key concerns:

1. It becomes purely deterministic, especially in conjunction with a deterministic view of choice, thereby absolving the individual of responsibility from their own actions.
2. By its nature there are “multiple equilibrium” with no clear definition of value – therefore it is a framework that appeals to utopians (and dystopians) who simply want to pick an outcome and demand we do what we can to get there.

Althought GG accuse others of extremism around choice – this rings hollow when their own framework is pure extremism.  If you don’t eat in a way that GG feel is appropriate it is not a choice, it is because someone else is forcing you.  By using a purely constructivist framework, they absolve themselves of facing the value judgement that people may have a preference for the unhealthy – and may trade that off to consume something they enjoy.  They allow themselves to target obesity as an outcome by making it external to the individual, when such a view is fundamentally insulting about the individuals capability to make choices.

Social constructivism is very popular with people who have an outcome they want to target, and want to ex-post motivate it.  This type of output focus, combined with a downplaying of individual agency, is the antithesis of the way I view economics – which is why I can’t help but write something

Where do you “disagree”

First let me state down where our frameworks meet.  Advertising to and information for kids does matter.  We build up a stock of habits, rules of thumb, and physical attributes as children which have a fundamental impact on the type of life available to us as adults – and we are ill equipped to make choices for ourselves.  In that case we do need to think about these types of issues.

But the point is that we are building up a stock of habits, rules of thumb, and physical attributes here – and it is through the active choices of adults.  Even in an “ideal” childhood where a masterful adult unaffected by advertising “creates” us as our own “perfect adult”, our preferences will differ.  As we just inherently like different things.  In such a place, we will still enjoy things.

When I was young we rarely had chocolate, and I wasn’t allowed coffee.  However, when I was an adult I loved chocolate (over it now) and caffeine drinks (still do).  No doubt these things aren’t good for me, and GG would gladly tell me so I’m sure, but I know this and want to do it anyway.

They reach far too far in trying to say that deviations from their ideal are due to promotions like toys in supermarkets.

This doesn’t answer the idea of toys in supermarkets though

For this, let me go to an old post of mine.

So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

However, there may be a role for government intervention yet. If McDonalds is an addictive good, and the consumer had no a priori knowledge that it was addictive, then the increase in future consumption (and the associated negative effects) of McDonalds is not taken into account when the person purchases a product. By advertising, they can increase demand and make more people fast food addicts. Now to do not know the degree with which fast food is addictive. However, government regulation, such as education or limits on advertising could be useful.

What is the advertising doing?  Is it increasing the subjective pleasure associated with the experience?  Is it misleading (making ex ante expectations and the realisation different) or creating a cost for other choices?  The difference matters if we actually respect individuals enough to accept they have some agency over their own choices.

In the case where we give little kids a toy of a milk bottle, a carrot, or a chocolate bar at the supermarket we are undeniably normalising “shopping at the supermarket”.  But in this instance it is hard to see how it will have much to do with anything about the kids stock of habits or rules of thumb growing up – apart from recognising certain brands above others.

Turning around and criticising the promotion because you don’t think people should eat chocolate bars, and so they shouldn’t be included in the promotion, is an unreasonable position – in what universe would a little milk bottle toy lead to future excessive milk consumption.

GG hits the nail on the head when he says that brands are competing to be part of the competition – but this is because they want brand recognition above competitors.  They are cultivating market share by making “Anchor” and “Pams” more recognisable names.

In truth all such an act is saying is that ANY promotion that could lead to higher consumption of a good GG doesn’t approve of is bad (so this includes discounts for chocolate bars, pretty labeling of high sugar foods, and Vinylcuttingmachineguide signs up in the supermarket hinting that you should have a dessert) – which in a policy sense gets increasingly close to treating disliked foods in the same way as tobacco and eventually fully banned substances.

But there are limits to our choices!

Of course there are, but it isn’t “perfect information rationality” or “social constructivism” – having to go to either extreme is ridiculous.  To quote from my post comparing the models of choice I use and I think GG use:

Yes we can think of matters through a “conscious” and “unconscious” mind, where the unconscious mind bear similarities to a computer – and where we ex-post rationalise choices to satisfy ourselves.  This model has empirical backing, is logically consistent, and suits my priors – so I’m comfortable with it.  And it is this context that the article Gareth discussed, and his own view on the obesity epidemic, are based.  In this way, yes we have the same model of fundamental choice.

Where we might differ is in terms of our belief that people can, will, and should precommit their actions and influence the rules followed by their unconscious mind.

I take a revealed preference approach to this.  If people don’t precommit, it is because precommitment itself is costly and so the benefits from doing so are presumed to be too low.  Their may be a failure in their expectations or information – in which case government can help.  Government may be able to offer low cost commitment mechanisms, or even at a push use framing effects to “nudge” (note, these framing effects should not be directly costly – something that often gets forgotten).  But that is that.

Contrary to what I often see GG write online, their opponents are not assuming perfect information or hiding behind choice – instead we accept that social factors have an impact on choice, and that habits exist, but we still recognise that people have different preferences and we can’t see them!

Sometimes I want Tim Tams knowing full well that they aren’t good for me, and in some part undermine my exercise.  If that doesn’t fit into your choice framework and policy advice, it is the framework at fault – not my choice.

I appreciate they want to avoid people “tricking me” to make ex-ante choices I regret ex-post, but the more I hear the rhetoric of addiction being whipped out, the more it starts to sound like GG wants to restrict my choice.  I love both these guys, but not enough to let you reduce my choice set

“We can look at past decisions and outcomes and predict exactly how happy you will say you are at any point in time,” said lead author Dr Robb Rutledge from University College London.

The experiment tested decisions under uncertainty, which is a well-researched topic in economics. The best model we have at the moment derives from Kahneman and Tversky’s development of prospect theory. At the core is the idea that our happiness depends on changes from our current situation. For example, glorious sunshine is only exciting if you don’t see it every day.

The twist that the neuroscientists confirmed is that our happiness at an outcome depends not only on where we start but where we expected to get to. If the weather forecast was great then a beautiful day isn’t such a cause of joy as it would be if rain had been forecast.

Studies such as these are crucial for informing our models of choice. Those models can seem esoteric at first but they are at the heart of arguments over alcohol regulation, plain packaging, compulsory pension saving and so on. This is the primary research that will define our future freedoms.

h/t: @chagelund

…assuming that decision processes are reducible to one-size-fits-all sets of axioms has not and will not produce a descriptively adequate account of human behaviour under risk and uncertainty.

Researchers find that people’s risk preferences are not stable. How risk averse is an individual? That depends on the situation.

The money quote:

They found that the biggest impact of a minimum price policy was on “harmful” drinkers in the lowest income quintile (7.6% reduction in alcohol), whereas the impact on harmful drinkers in the highest income quintile was modest (1%). Consumption fell by 1.6% among “responsible” drinkers in the lowest income quintile. That is, the impact is concentrated among low-income harmful drinkers.

Moreover, this Lancet paper found that “Individuals in the lowest socioeconomic group (living in routine or manual worker households and comprising 41·7% of the sample population) would accrue 81·8% of reductions in premature deaths and 87·1% of gains in terms of quality-adjusted life-years.” In the public health field, we seldom see policy packages that have such a notable impact on reducing health inequalities. [** Further comment at end].

The gains come from putting a minimum price of alcohol that prices the poor out from consumption.  Consumption that has a benefit – something that is ignored constantly.

Talk about evidence all you want (a lot hopefully – as evidence is central, and I respect the PHB for bringing empirical research up so constantly), but if your ethical framework places zero benefit on consumption choices of the poor your policy conclusion will be restricting the choice of those in poverty – always.

Given I expect some random comment like “you are assuming perfectly rational choice” from people, I’ll cover that upfront.  No I’m not, not even close.  I’m asking us to actually allow for the fact some benefit may exist – rather than setting it to zero.  And that those who are poor actually have the right to some agency.  It is the assumptions of those who want to restrict choices that are extreme, and that should be due to more scrutiny.

If we want to help those most in need, surely our focus needs to be on opportunity, capability, and treatment – not on taking away their choices.  A minimum price of alcohol works by “pricing out” the poor, limiting their choice set, and thereby removing choice.

This isn’t nit-picking, it is a central point about policy relevance – totally and completely central.

Update: Eric Crampton notes a bunch of posts regarding the issue in this tweet:

@WillTaylorNZ @garethmorgannz A few. http://t.co/id3goRW1Nr http://t.co/rIzPdZvLWv And @llibecon here: http://t.co/tkf2q1xx99

— Eric Crampton (@EricCrampton) May 29, 2014

Update 2:  I was a bit late reading NZ econ blogs this week, and only just came across this from Eric at Offsetting – it is very good, and very relevant.  I am fundamentally and centrally concerned with how economics language is being used to link descriptive analysis and policy in a lot of modern literature – in a way that involves strong, and obfuscated, moral judgements.

However, this also means I can’t post on things I find cool.  So I’ll just give you some links

1. Greg Mankiw mentions the harm principle and economics.  “First do no harm” is a good principle for us to hold when considering policy, I agree.
2. Details do matter though, via Mark Thoma and also a piece by John Aziz. My view of this in general would be that the “harm” comes from a “change” in policy from an “initial position” – how do we define this initial position such that something counts as change?  If we define it solely as “now” then we are simply conservative, if we define it as some “ideal type” that we believe is “natural for the social system”, we are trading in ideologies.  Applying the harm principle starts to get tricky! [Note:  In the comments to the recent Hand posts (here, here) there has been further discussion of this]
3. Tim Harford, Chris Dillow, and Noah Smith all discuss behavioural economics – plenty of interesting points in there if people want to think about choice, its relation to trade-offs, and its relation to policy.
4. From Mark Thoma again, the misuse of theoretical models.  Given my interest in methodology I’m certainly interested in reading this (what they establish as the ‘should’ how they find what ‘is’ in modeling) – I’m sure you all feel the same way
5. And because I have to put up something about inequality here is Lane Kenworthy.  The US example is an interesting one, but I would almost think that lower growth in the low and middle parts of the income distribution is itself defined as higher inequality – it is almost tautological to say one caused the other.  The magnitude of the gap over there tells us that it is an issue worth looking into though!

@TVHE You are assuming perfect information

— Gareth Morgan (@garethmorgannz) February 23, 2014

It did get me thinking though.  The two of us actually have almost exactly the same model of choice in our heads for this issue, and as a result any differences of view of on the appropriateness of policy that we might have are not due to differences in the underlying model.  Recently I saw this paper via Neuroskeptic on twitter, and my reply to that also was:

@Neuro_Skeptic While I agree in large part, the author downplays commitment to future rules – dangerous when discussing addictive behaviour

— TVHE (@TVHE) March 4, 2014

Yes we can think of matters through a “conscious” and “unconscious” mind, where the unconscious mind bear similarities to a computer – and where we ex-post rationalise choices to satisfy ourselves.  This model has empirical backing, is logically consistent, and suits my priors – so I’m comfortable with it.  And it is this context that the article Gareth discussed, and his own view on the obesity epidemic, are based.  In this way, yes we have the same model of fundamental choice.

Where we might differ is in terms of our belief that people can, will, and should precommit their actions and influence the rules followed by their unconscious mind.

I take a revealed preference approach to this.  If people don’t precommit, it is because precommitment itself is costly and so the benefits from doing so are presumed to be too low.  Their may be a failure in their expectations or information – in which case government can help.  Government may be able to offer low cost commitment mechanisms, or even at a push use framing effects to “nudge” (note, these framing effects should not be directly costly – something that often gets forgotten).  But that is that.

It may be possible to take a more paternalistic line, and say that there is a certain way people should be.  I disagree with this, and I don’t know if this is actually Gareth view, and this is why I said this “might” be a difference – in may not be.  However, if it isn’t a difference and we have the same view of choice, I am uncertain why he would have disagreed in the way he did with my tweet.

What does this have to do with the title of the post?

I’m getting there.  One thing Gareth has been pushing is a sugar tax, a recent tweet about it was here:

Sugar tax may be necessary, England's chief medical officer says http://t.co/egTCcp6IPV

— Gareth Morgan (@garethmorgannz) March 5, 2014

Now I touched on some of the limitations of the tax idea in this post.  However, the limitations I pointed out do not imply that the best tax itself will be zero – I leave myself more open here.  They are just issues we should consider.  Geoff Simmons touched on these things (he is writing with Gareth on these issues) in this tweet:

@TVHE Interesting. What do you think mechanism to justify smoking tax? I would say time inconsistency, health costs, plus productivity loss

— Geoff Simmons (@geoffsimmonz) February 14, 2014

I understand the argument for a tax based on time inconsistency issues and a version of “user pays” for health care – a linear tax when the cost is highly non-linear is a rough solution, but it is at least worth looking into.

However, if Gareth disagrees with my point on precommitment and does not think there is any “control”, this in part undermines the case for a tax.

If people are not making choices due to “substitution” (the change in the relative price of food) because they are programmed to just eat, the only way a tax changes behaviour is through the income effect – essentially making people poorer.  So a tax program will exacerbate poverty.  Furthermore, if people are not making choices, we don’t get a substitution towards a healthier diet.

The part of the externality associated with “user pays” is still relevant, independent of a change in behaviour.  However, given how imprecise the tax is at actually targeting this ‘policy externality’ it might be a bit more appropriate to just target it directly – say by having user pays for obesity related disease.  If we don’t want to do this, as we think society should pay, then there is actually no externality!

The part of the externality associated with “time inconsistency” is completely irrelevant without a change in behaviour.  It is a transfer between “different versions of the self”, so if we don’t change behaviour it just nets out.

Note:  Externalities from “loss of productivity” aren’t externalities.  There is a market price for labour.  Claiming this as an externality is becoming increasingly fashionable among economists, and it makes me very uncomfortable – it deserves a post of its own to be honest!

Conclusion

Choice issues are hard.  Policy issues are hard.  Both Gareth and Geoff know this, I’ve talked to them in the past.  Furthermore, I think this sort of tweet indicates that they realise, and care about the fact that, these are delicate complicated issues:

The use of financial incentives for weight loss is promising, but tricky to get right. http://t.co/m82buQiVD7

— Geoff Simmons (@geoffsimmonz) March 5, 2014

However, I am uncertain why the rhetoric that sometimes comes out places little faith in individual choice – given we are using the same choice framework to understand the issues.  Yes people make bad choices and regret them, yes most people don’t seem to make choices that we feel we would have made in their shoes, but fundamentally people are all incredibly different.

Most importantly though, if we are going to use a rhetoric about choice that takes away individual responsibility, we have to be careful selling a policy that demands changes in individual choice – this is a logical inconsistency.  If we do so because the “natural” conclusions of our rhetoric, towards controlling choice, appear abhorrent, then perhaps the rhetoric we are using is downplaying the propensity of individual choice!

I genuinely like the fact that Gareth and Geoff are looking into these issues, and trying to describe the role of policy and choice.  Furthermore, my comments are a call to do analysis – not to say we shouldn’t!  I am just always cautious of the role of policy within an environment with individual agency, namely:

@garethmorgannz I will do, thanks! I just worry that focuses on nudges, without individual agency, can lead us a bit astray!

— TVHE (@TVHE) February 23, 2014