STUDENT ID number: 14330529

Module code: ECON3029

Module title: Advanced Political Economy
Word count: 2000
Voters formulate their choice in an economy not based on material-self-interest but based on
“sociotropic” consideration of the whole macroeconomy (Feddersen, 2004). These tendencies
motivated by concern for welfare for others encourage voters to organise into groups. Coate
and Conlin (2004) introduced the Group rule utilitarian (GRU) model which is an ethical
voter model based on the “sociotropic” tendency of voters. Under this model, all voters have
consensus regarding desirable election outcome because of their conformity tendencies; but
have different individual associated costs of voting. Voters in the group act according to a
behavioural rule based on the group’s evaluation of election and preferences. By following
the group’s rule, the members receive positive payoffs that contributes towards their direct
benefit of voting. They prefer fulfilling their duty instead of the consequences (Kant Theory).
Collective application of the rule by every group voter leads to maximisation of group’s
(expected) utility. The behavioural rule or strategy has a form of cost cut-point which is the
threshold level of cost for the group under which the utility is maximised, given everyone
follows the group welfare-maximising rule. The welfare-maximising rule implies that voters
with the individual cost of voting less than the threshold cost do vote because of their ethical
duties. However, voters with greater individual costs are not ethically required to vote by the
rule . Voter members by following the welfare-maximising rule can get direct benefits greater
than individual costs (Feddersen, 2004).

Thus, an individual’s choice to vote depends on the group rule and not on the individual
pivotal probability of change of outcome as in the Pivotal-Voter model. Moreover, the
group’s pivotal probability can be increased if every member follows the rule. This would
lead to a higher value of threshold cost leading to a large no. of members to vote because the
individual cost of voting would be less than the threshold cost. Thus, GRU produces higher
voter turnout compared to the Pivotal-Voter model and helps economists understand why
most people vote in large national elections. Moreover, GRU Model, by organising voters in
a group, models the source and value of direct benefits for voters in an economy which
couldn’t be done under the Pivotal-Voter model. GRU helps to understand that why voters
with high costs vote because these individuals might be a part of a group with a high
threshold cost.

GRU is also significant in analysing election patterns. Through the application of GRU, the
reason for falling voter turnouts in many countries can be pointed towards the decline of class
solidarity among people which discourages them to be a part of a voting group. Comparative
Statistics of GRU can help determine an election’s turnout and margin of victory between
two major political parties as both turnout and margin of victory are positively correlated. As
relative sizes of voter groups become equal, turnout increases from all the groups and the
margin of victory decreases in an economy. Overall, GRU helps in uncovering the dynamics
of voter participation in an economy effectively.
The following essay uncovers and analyses the grounds on which Libertarian Paternalists
have advocated “nudge”-style policy interventions. The origin and need of “nudge”-style
policy interventions provide a foundational background of the analysis. Consequently, the
role of Libertarian Paternalists in using nudge policies is discussed to approach the research
question. Finally, the merits and applications that drive Libertarian Paternalists to employ
nudge policy tools are evaluated. In the end, the feasibility of Libertarian Paternalist’s use of
nudge policies is assessed by highlighting Robert Sugden’s opinions about nudging and soft
paternalism. Including all the relevant contributing factors in the analysis conclusion
regarding Libertarian Paternalist’s use of nudging policies can be formulated.

The notion of “nudge”-style policy interventions arises because of human psychology’s sub-
optimal or irrational decision-making, contrary to rationality assumption of conventional
economics (McFadden, 1999) (Ariely, 2009) (Sunstein & Thaler, 2003). Individuals get
involved in irrational decision-making because their choices are context-specific (dependent
on choice architecture and information available). The individual choices are also dependent
upon choices of the crowd and are focused on short-term gains driven by temptations (doing
now > planning for future). Increasing worldwide levels of credit-card dues, mortgages,
obesity and pollution are prime examples of cognitive bias in decision making by people who
are sub-optimal in their point of view. It can lead to market failure and reduction of the
collective welfare of the population. Sunstein & Thaler (2003) claim that “traditional
assumptions about individual rationality are untenable”. They introduce “nudge”-style policy
interventions which alter the choice architecture for individuals, triggering their automatic
cognitive process to lead them towards decisions which are better for them- in their point of
view. By altering choice architecture, the features of the decision environment are changed
while preserving the freedom of choice. Choice architect influences the behaviour and
decision making, in-turn, influencing the welfare of the individual.
Both private and public agents act as paternalists because an individual’s decision is affected
by these agent’s chosen choice architecture (Thaler & Sunstein, 2003). Thaler & Sunstein
(2003) elaborate that paternalism is inevitable for these agents and there is no other viable
alternative. In the absence of coercion in a paternalist’s decisions, these agents act as
Libertarian Paternalists. Libertarian Paternalists aim to improve the welfare of individuals by
exploiting aspects of human psychology to make them better-off, while preserving consumer
sovereignty by not restricting choices (Thaler & Sunstein, 2003). Libertarian Paternalists with
benevolent objectives have used nudge policy interventions in diverse sectors to steer
behaviours of individuals in desired directions where “use of classical policy instruments,
such as taxes, subsidies, or command-and-control regulation, is not feasible and policies need
to rely on the voluntary participation of individuals” (Ghesla, et al., 2015) (Croson & Treich,
2014) (Kesternich, et al., 2017). Sunstein & Thaler (2003) promote that agents might also
engage in soft paternalism to drive an individual’s decision making where they are unaware
of their interests. Sunstein & Thaler (2003) draw similarities between soft paternalism and
Libertarian Paternalists.

Nudging strategies provide libertarian paternalists with diverse applications to increase

collective welfare in society. Default strategies are a prominent nudging strategy where
libertarian paternalists make a desirable option default for individuals with an option to opt-
out for persevering their sovereignty. These strategies make individuals more likely to choose
the default option instead of opting out. This is because individuals desire to reduce the
cognitive effort required to assess various alternatives. Moreover, the loss aversion tendency
of individuals makes them believe that there is more disutility in giving things up than in
gaining things. Default strategies effectively endorse pro-environmental choices (Ebeling and
Lotz, 2015), free school meals in the US to improve youth eating behaviour (Metcalfe et al.,
2020), retirement savings (Cronqvist and Thaler, 2004) and charitable donations (Goswami
and Urminsky, 2016). (Ghesla, et al., 2015) discovered that pro-social behaviour encouraged
by default nudging contracts has no adverse spillover effects.

Another major nudging policy is based on conformity tendencies of individuals (following

the herd) where they are more likely to undertake choices which they believe the majority of
people are doing. These policies have vast application for tax compliance (Hallsworth et al.,
2017) (John and Blume, 2018) and population-wide health and safety interventions (Saghai,
2013) (Lindhout and Reniers, 2017).
Overall, nudging policies help individuals to take optimal decisions which are better-off for
them, from their point of view. Hence, nudging increases the satisfaction of an individual’s
actual preference (Tomer, 2008). These policies also don’t violate consumer sovereignty and
maintain freedom of choice. Sunstein & Thaler (2003) said that nudges can be used to
improve people’s well-being and help solve society’s problems. Moreover, these policies can
be executed at a very low cost and can generate high payoffs. For instance, a nudge that
encouraged new employees for indicating contribution to the retirement savings scheme
produced a $100 increase in employee contributions per $1 spent on program implementation
(Benartzi et al., 2017).

Nudging has various benefits for regulators in an economy. Guala and Mittone (2015)
provide political justification for nudging policy interventions that can improve subjective
well-being in an economy by replacing irrational agents with well-behaved ones. These
policy interventions by regulators can correct the biases of inter-temporal behaviour choices
like smoking and drinking, which impact the current and future welfare of the whole society.
Additionally, regulators can use nudging to tackle market failure. Corporate entities might
exploit the sub-optimal behavioural tendencies to gain profits. For instance: default travel
insurance along with aeroplane tickets and add-on default charges with hotel stay costs.
Profitable nudging by companies might lead to market failure in the economy where a
consumer’s well-being would be affected (Tomer, 2008). Thus, regulators can use educative
nudging to safeguard consumers to prevent market failure.

The effective merits and vast applications of “nudge”-style policy interventions make them a
strong influential policy tool. This has led to the strong advocation for use of “nudge”-style
policies by libertarian paternalists. However, despite nudging policy’s merits, Robert Sugden
evaluates and highlights the key foundational weaknesses of this phenomena.
Sugden (2008) bases the premise of his evaluation on the differences in findings between
Behavioural economics (BE) and Normative economics (NE). He recognises that the
preferences of individuals are context-specific which may make them nudgeable but doesn’t
label them as evidence of errors. In its place, He calls these preferences incoherent. Sugden
(2008) calls for a reconciliation between BE and NE. This is because the Pareto principle,
under NE, which tests the efficiency of preferences, assumes that “preference ranking of the
relevant objects is the same under all ancillary conditions” (Sugden, 2008). In case of market
failure, NE based policy interventions are recommended to bring the market closer to Pareto
efficiency outcomes. However, under BE if preferences are context-specific then Pareto
efficiency’s assumptions are undermined due to which normative policy intervention policies
can’t be suggested. Soft paternalism and the idea of nudging can solve the market failure
problem in absence of any NE policy tool, but Sugden (2008) raises key concerns about the
feasibility of the paternalistic policy approach.

Sugden (2008) argues that these agents might not have access to the knowledge of
preferences and are only relying on unwarranted assumptions about human psychology.
Thus, soft paternalism is based on what nudger thinks is good for the individual and fails to
identify the interests of an individual. This makes it a full-blown paternalism where
paternalistic agents restrict, guide or interfere with an individual’s preferences based on their
own judgement and assumption. He adds that that “it is not paternalistic to restrict one
person’s choices to improve another person’s welfare”.

He also argues that choice architecture changes to influence an individual’s context-specific

decisions may not indicate an individual’s underlying preferences because factors such as
inclination and temptations may still play a role. A consumer might get attracted by both fruit
and cake on the top shelf.

Sunstein & Thaler’s (2003) idea of soft paternalism aims at eliminating the errors in decision
making due to focus on short-term gains driven by temptations. Sugden (2008) argues that
the order of preferences of an individual are time-varying as an individual might prefer short-
term gain in a situation. Thus, soft paternalism arbitrarily privileges long terms gains
compared to short term and ignore different perspectives of an individual.

Conclusively, Sugden (2008) tries to reconcile both BE and NE through the application of
human psychology. He suggests that markets should be considered as discovery processes
where individuals have partially formed preferences. They can be allowed to act on
temptation and inclination for their short-term gains as their choices are context-specific. In
these markets, entrepreneurs provide what they want & when they want it. This would allow
mutually advantageous activity for consumers and entrepreneurs as markets will be
responding to the wants of individuals.

Henceforth, Libertarian Paternalists have advocated for “nudge”-style policy interventions

because of their diverse merits and vast applications which aim to increase the welfare of
individuals. Nearly 136 countries have incorporated nudging in their public policies, and it is
also being actively used by private agents for better running their organisations. However, the
fundamentals of nudging, based on Behavioural Economics, are very divergent from that of
Normative economics. This raises questions about the feasibility of the policy tool and its use
by soft paternalists. Thus, this calls for reconciliation between the two broad but similar
streams of economics to collectively study decision-making behaviour and preference
formation to formulate improved market policy tools that promote efficiency.
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