Incentives and social preferences

Incentives are widely and frequently used to influence preferences among people with the aim of achieving some socially beneficial end. These incentives include fines, rewards, and taxes. From the domain of health, Pigouvian taxes on foods deemed unhealthy and pricing schemes for alcohol are examples of such incentives. But, evidence often reveals that these incentives are not having the effect that would be expected from a rational homo economicus; often the effect is smaller than expected and in some cases is the opposite of what is expected. In one well-cited experiment, the imposition of fines on parents arriving late to pick up their children in Haifa, Israel, resulted in double the number of late pick-ups (Gneezy and Rustichini, 2000). Social preferences must be playing a role. In an extensive review of economic experiments, Bowles and Polania-Reyes (2012) examine whether economic incentives and social preferences are substitutes or complements. For policy-makers, the non-separability of incentives and social preferences is important; if incentives act as a substitute for preferences for some socially beneficial end, then their imposition will lead to lower than expected or opposite effects.

To examine how social preferences and incentives interact, Bowles and Polania-Reyes identify two types of preference: state-dependent and endogenous. They distinguish them as follows:

As Italian residents, your authors now eat a lot more pasta than we did in our countries of origin. Abstracting from possible international price differences, this could be another case of “when in Rome, do as the Romans.” Or it might be that we have newly come to enjoy the taste of pasta, perhaps through extensive exposure to it while in Italy. Which case it is—state-dependent or endogenous preferences—would be revealed by what we will eat back in Bogotá or Santa Fe. If we go back to arepas or potatoes, then our taste for pasta was state-dependent. If we remain pastaphiles, then our preferences have endogenously changed.

Extending from this, the authors define mechanisms by which incentives and preferences interact. Under a state-dependent mechanism, the situation, environment, or way (e.g. the state) in which an incentive is administered can alter preferences in three ways:

  • Bad news – the incentive provides information about those administering the incentive (the principal).
  • Moral disengagement – the incentive ‘crowds out’ moral values; in the absence of an incentive individuals rely on moral preferences.
  • Control aversion – Incentives compromise self-determination; people do not like being manipulated and wish to be treated with dignity and autonomy.

All three cases are relevant to health policy, but, perhaps, it is the last that may have the largest effect. There are frequent attempts to provide incentives to manipulate the diet and drinking and smoking habits of individuals. Fast food and fizzy drinks taxes have been proposed frequently (e.g. here and here). A purely rational homo economicus would respond accordingly to these taxes and adjust her preferences in accordance with the differing marginal cost. But, these taxes may be viewed as a dictation of behaviour from a political class without regard or understanding for choices or preferences for those from different backgrounds and the response may be to do exactly the opposite. Similarly, an imposition of a Pigouvian tax may lead to moral disengagement as the tax and market act as a substitute for social responsibility to protect health.

Incentives may alter preference acquisition in the long-term as they influence economic rewards and social status of those with different preferences. The economic structure of a society has been shown to affect parental child rearing values, personality traits, and developmental influences (Bowles, 1998). From a broader, political economic perspective, the economic structure of society also provides the opportunities, objectives and constraints under which state managers operate. They have to balance both trying to improve public health with the necessity for electoral success (other self-interested motives notwithstanding). The economic structure which leads to preferences among the poor for health-related behaviours that generally have a negative aggregate effect on public health is the same economic structure that leads state managers using taxes and fines to both provide incentives to alter health-related preferences but also to shift the burden of the net result of those preferences onto those individuals. But, for the aforementioned reasons, including social position and wealth, these incentives may just replicate the same socioeconomic conditions that may have led to the acquisition of those preferences in the first place.

Incentives could also have a crowding-in effect; amplifying already existing social preferences. However, understanding when this is the case is very difficult ex ante. Bowles and Polania-Reyes conclude their study with the following:

The policy package of which the incentives are part should let the target understand that the desired modification in her actions will serve to implement an outcome that is socially beneficial so that the target is more likely to endorse the purpose of the incentive, rather than being offended by it as either unjust or a threat to her autonomy or in some other way reflecting badly on the intentions of the planner.

What is also clear is that, particularly in the case of health policy, creating a distinction between an economic world and a non-economic social and political world, as is the case in much of neoclassical economics, may serve as a hindrance to understanding and implementing effective policy.


No borders, no nations, no user charges

It was recently proposed that, here in the UK, foreigners should start having to pay towards their health care because of the apparent budgetary pressure from ‘health tourists’. Let’s be clear upfront; this isn’t a problem. If you believe the media, ‘health tourism’ costs the NHS around £30m per year. That’s less than 0.03% of the NHS budget. And the evidence suggests immigrants don’t use much health care anyway. Nevertheless, at some point in the future, this issue may really need addressing.

The case for treating everyone

The moral case seems obvious; everybody has an equal right to health care. If you think nobody has a right to health care, that’s fine too, but why should foreigners’ health be of less value? Economics, arguably, has a great cosmopolitan and egalitarian tradition. Most economists have been driven by their discipline to accept humans as being equal; even if they’re immigrants. This perspective, I suspect, extends to health economists in the UK.

The NHS constitution does not discriminate against foreigners, so it would presumably need changing if user charges for immigrants are introduced. It states that “public funds for healthcare will be devoted solely to the benefit of the people that the NHS serves“, but does not state who is included in “the people”. I’d like to think it includes anyone who happens to be within our borders at their time of need. Surely it should at least include NHS employees; many of whom are immigrants. If we decide not to treat foreigners for free it means that we do not value their health gains equal to ours. Indeed, the implication here is that any health care they receive is at the expense of a native. If this is the case then we health economists will need to adjust our cost-effectiveness analyses to shift any observed benefits for immigrants to the cost side of the equation.

I totally buy in to the moral case for open borders. It matters not to me whether you were born in England or not; nor does it matter to me whether or not you pay taxes. What’s more important to me is that you are willing to pay taxes, and I know plenty of born-and-bred Brits who would readily shirk their tax-paying responsibilities given the chance. For me an immigrant or a tourist has as much right to health care as an unemployed native. One cannot oppose treatment of immigrants on the grounds that they do not pay taxes without also opposing treatment for the unemployed. Case closed.

Moral arguments aside, plenty of services provided by the NHS also resemble public goods. The spread of infectious disease is an obvious risk of discouraging foreigners from seeking treatment. Furthermore, poor health may prevent or discourage immigrants from entering the labour market. It seems possible, if not likely, that charging immigrants a nominal fee for their health care would cost more than it saved. Hopefully we’ll see more evidence either way in the future.

The case against treating everyone

I can’t fathom a moral objection. Xenophobia might be to blame for the recent policy proposal, but I’ll leave it to others to try and figure out the moral arguments against treating everyone. Practically, however, and it pains me to say this, in the case of the NHS we could potentially have a problem. If a health care system is funded through national health insurance or taxation, the system can’t afford to insure the global population. Milton Friedman would probably agree on this point. The availability of welfare is likely to attract migrants who hope to receive it. Rational agents with health care needs would flock to the UK for treatment.

The budgetary pressure of ‘health tourists’, in the extreme, could dramatically reduce the average health expenditure per NHS patient. More care for ‘health tourists’ leads to less care for natives, and it seems difficult to justify reductions in the quality of care. Just to reiterate, this isn’t a problem right now. The tiny nugget of the budget that goes towards treating ‘health tourists’ does not jeopardise the quality of care provided by the NHS. I am speaking in hypothetical terms here of a situation which hopefully will never arise, but for which we should have a solution.

The solution

I don’t know. Obviously every country in the world should provide high quality universal health care that is free at the point of delivery; regardless of one’s nationality. This might happen some day. Let’s hope it does. In the meantime let’s stop legislating for problems that don’t yet exist.

What do you think? Vote in the poll and share your thoughts in the comments box below

Cannabis and asbestos: The cost-effectiveness of prohibition as health policy

The aim of a health intervention is generally to cause a cost-effective increase to some normative outcome such as by reducing mortality, increasing productivity and so forth. Often policy makers want to encourage or discourage certain behaviours by using incentives or disincentives. One such way the government may intervene is through prohibition. Often drug prohibition is touted as a health policy intervention to prevent harms both clinical and social. However, it is probable that this form of intervention is not cost-effective.

Let’s distinguish prohibition from other forms of disincentivisation by saying that prohibition does nothing to internalise the externality that harmful behaviours create. A tax on cigarettes disincentivises the consumer into smoking less but the revenue can be used against the negative effects of smoking, it is a Pigouvian tax; whereas putting someone in prison compensates no-one. Admittedly such laws are being reformed to help addicts rehabilitate rather than punish them but these programs are not funded by drug use itself.

One of the most widely discussed prohibitions is against cannabis. (I don’t want to wade into any other arguments than whether it is a successful health policy intervention.) A recently, well-publicised study showed that cannabis use in under 18s was associated with a reduction in IQ of less than 1 point. Firstly, I would argue that this paper does not demonstrate causal effects. The authors used OLS with the outcome as adult IQ minus childhood IQ, and the independent variables were cannabis and other drug use. Without delving too deeply into the discussion, there are potential standard error and endogeneity issues.  Second, this effect is quite small. But, other studies show that cannabis is also associated with an approximate 40% increase in the risk of psychosis. Prohibiting it may be a good way of intervening to prevent these negative effects. But what are the costs?

A report suggests that the cost of policing cannabis in the UK is about £500m annually. On top of this there is a possible opportunity cost in not legalising it of about £6.4b from lost revenue. So what is the cost-effectiveness of prohibition in this case? The current prevalence of psychotic disorders is about 5 in 1,000 in the UK. If everyone used cannabis then this could increase to 6 in 1,000 in the worst case that would be around 60,000 cases of psychosis which may equate to a loss of 30,000 QALYs (based on a QALY of 0.475).  This incredibly crude calculation yields a cost per QALY of about £250,000/QALY. There may be other benefits, such as modestly increasing the IQ of a small number of people, but that is certainly not going to be enough to justify the costs. And since only a small proportion of the population uses cannabis regularly this value is going to be many times larger, and certainly over £1m/QALY. Clearly it is not cost-effective.

This may be true of other bans as well. An older report by the World Bank in 1994 suggested that the ban in asbestos in the US valued the cost per statistical life saved at about $49m, much more that the standard compensation workers receive for risk, about $5m per statistical life.

I would think that there would be much more effective ways of spending such sums of money in increasing health and safety and protecting the worker or consumer. This could be through taxes or subsidising substitute products or compensating workers better and internalising the externality. This is not an argument for a free market, just a well regulated one that uses cost-effectiveness policies more effectively.