The power of nudge
Presidential hopeful Barak Obama and Tory leader David Cameron have been influenced by the ideas in ‘Nudge: Improving Decisions About Health, Wealth and Happiness’. Authors Richard Thaler and Cass Sunstein advocate regulatory architecture that guides the citizen to select a predetermined ‘best’ option. Broadly known as ‘behavioural economics’, the authors’ theory has been dubbed ‘libertarian paternalism’.
Policymakers have long understood that the assumption of classical economics, that humans are rational and self-maximising, is a misconception. Economists have been exploring the implications of behavioural psychology for decades, but it is only recently that academics have sought to engage politicians by producing a set of principles that can be incorporated into policy design.
The Serco Institute is interested in the relevance of behavioural economics to public service contracting. A contract with clearly defined performance objectives and associated financial incentives is a classic example of public officials ‘nudging’ providers to achieve policy outcomes. However, contracts for complex services cannot rely solely on financial incentives; they require complex governance regimes of the kind used in public-private partnerships. A limitation of behavioural economics is that it is concerned with regulating the individual and provides little insight into the governance of more complex institutions such as firms.
However, behavioural psychology can also offer insights into the optimal design of public service contracts. For example, there is evidence that introducing an intensive performance incentive regime for frontline workers may undermine their intrinsic motivation to achieve high standards, and that framing financial incentives as rewards may elicit greater cooperation than imposing ` penalties for failures.
The important lesson for contractors – and perhaps more so for government – is that it is possible to design and manage contractual regimes that undermine the conditions for success. In contrast, a better understanding of the consequences of certain kinds of regulation and incentives may lead to more effective contracts.
Lauren Cumming, The Serco Institute: www.serco.com/institute
