The importance of accounting for spillover effects in policy design

Marcela Jaime recently defended her thesis: Essays on behavioral Economics and Policy Design. What it is about?

My thesis is about unintended effects of behavioral and policy interventions and its effects on policy design. Unintended effects of policies, either positive or negative, are often referred to as spillover effects. Specifically, my thesis investigates spillover effects of monetary and non-monetary policy instruments for environment and natural resource management, in both developing and developed settings.

The first two chapters investigate spillover effects of a behavioral intervention aimed at residential water savings in Colombia. Because there is little room for price reform and water prices are highly subsidized, the intervention relies on the use of non-monetary incentives such as provision of social information. The first chapter focuses on spillover effects due to social interactions within the specific area of water use.  The second chapter identifies behavioral spillover across different areas of consumption (i.e. from water to electricity use), that are potentially driven by personal motivations. The third paper focuses on monetary incentives, and investigates policy spillovers resulting from the interaction of subsidies in EU agriculture, before and after the introduction of the 2003 reform of the Common Agricultural Policy (CAP). The subsidies under study correspond to the main pillars of the CAP, which account for the monetary support devoted to agricultural and agri-environmental policy in the EU. Although there is consensus regarding the economic importance of having both subsidies in place, there is a concern that their interaction may weaken the adoption of sustainable practices, affecting environmental goals.

What do you think are the most interesting findings?

Overall, the thesis highlights the importance of taking spillover effects into account. This is important because spillover effects make it difficult to evaluate policies that were designed to target a particular behavior or economic sector. My thesis shows three examples of policies whose benefits would have been underestimated if spillovers were not accounted for.  Although spillover effects are often disregarded in empirical studies, they have important potential for both policy design and cost-benefit analysis.

Any main messanges?

This thesis has two main messages: First, the  social information campaign in Colombia demonstrates the potential of non-monetary incentives to influence water use in a developing country setting. The effect was greatest among higher-income and high-usage households, two populations that impose more pressure on the resource. This suggest that it is possible to save water without harming the poor. Also, the fact that behavior was transmitted within the targeted population across different areas of consumption suggests additional benefits of the intervention on electricity use. Second, the study of the interaction between agricultural and agri-environmental policy shows that it is possible to reverse the negative effects imposed by antagonistic policies that rely on monetary incentives. This highlights the importance of policy coordination.

What can your results contribute to?

The findings open up for a discussion regarding the appropriateness of using non-monetary incentives as mechanisms for influencing individuals’ behavior in developing countries. Moreover, the fact that these incentives affect individuals’ behavior in areas other than those targeted by the policy, and that behavior can be transmitted from one individual to another, provides evidence supporting the importance of using these incentives more frequently as policy instruments. Similarly, the findings are expected to contribute to the discussion of the importance of policy coordination.  Thus, these findings contribute to the discussion on the importance of accounting for unintended effects of policies, as inputs not only for policy evaluation but also for the design of more cost-efficient interventions.

BY: Karin Jonson

News | 30 June 2015