On the ‘cashing out’ hypothesis and ‘soft’ and ‘hard’ policies

Geoffrey Brennan a,b,c, Michael Brooks d,⁎a Philosophy Program, Research School of Social Sciences, Australian National University, ACT 0200, Australiab Political Science Department, Duke University, Durham, North Carolina, USAc Philosophy Department, University of North Carolina-Chapel Hill, Chapel Hill, North Carolina, USAd School of Economics and Finance, University of Tasmania, PO Box 85, Hobart, Tasmania, 7001, Australia

a r t i c l e i n f o a b s t r a c t

Article history:Received 6 July 2010Received in revised form 2 June 2011Accepted 2 June 2011Available online 14 June 2011

In the literature on paternalism that has grown out of the behavioural economics ‘revolution’, adistinction is drawn between ‘hard’ and ‘soft’ policies. Although this hard/soft distinction seemsto be motivated by the thought that the two policy types might have different implications forindividual liberty, there is a claim that ‘hard’ policies are normatively superior to ‘soft’ for‘efficiency’ reasons. We show, by appeal to an esteem-basedmodel of ‘soft’ policy that this claimis not valid in general. We also expose a number of conceptual mistakes in what many seem tohave identified as the normative implications of behavioural economics.

© 2011 Elsevier B.V. All rights reserved.

JEL classification:D03D6H2

Keywords:‘Hard’ and ‘soft’ paternalismSocial esteemIsraeli kindergarten puzzleEmotional tax

1. Introduction

One of the legacies of the behavioural economics literature, and its associated interrogation of standard interpretations ofrationality assumptions, has been an increased interest in the scope for paternalistic policies of various kinds. These policies are“paternalistic” in the sense that their rationale lies in improvements in the well-being of the individuals whose behaviour isaffected—essentially independent of any change in the behaviour (or utility levels) of other individuals. Paternalistic policies aretherefore to be distinguished from policies rationalised by the ambition to “internalise externalities”. In the “externality” case, therationale for behavioural adjustment by each is that such adjustment is in the interests of others.

In the paternalism connection, a distinction has emerged between ‘soft’ and ‘hard’ paternalism. The hard/soft distinction, as it isdefined in this literature,1 stipulates that ‘hard’ policies operate through changes in relative prices induced by taxes and subsidies(and in the limiting case, via prohibitions), whereas ‘soft’ policies “…change behaviour without changing the choice sets ofconsumers” (Glaeser (2006) p. 149). Glaeser elaborates: “… examples (of ‘soft’ policies)…include ‘debiasing’ campaigns, defaultrules and other interventions that change beliefs and attitude(s) without impacting formal prices faced by consumers” [p. 149].

Strictly speaking, the distinction between ‘hard’ and ‘soft’ is a distinction about types of policy. In principle, ‘soft’ policies couldbe mobilised for “internalising externalities” no less than for paternalistic reasons. The hard/soft distinction connects to thebehavioural economics literature, it seems, not via paternalistic possibilities but rather because the cognitive and calculative andinformational “failures” studied in behavioural economics also serve to alert us to a wider range of influences on behaviour than

European Journal of Political Economy 27 (2011) 601–610

⁎ Corresponding author. Tel.: +61 3 6226 2286; fax: +61 3 6226 7587.E-mail address: Michael.Brooks@utas.edu.au (M. Brooks).

1 We follow Glaeser (2006) in this respect.

0176-2680/$ – see front matter © 2011 Elsevier B.V. All rights reserved.doi:10.1016/j.ejpoleco.2011.06.001

Contents lists available at ScienceDirect

European Journal of Political Economy

j ourna l homepage: www.e lsev ie r.com/ locate /e jpe

economists typically acknowledge—and thereby, to a wider range of mechanisms through which policy might operate. There doesnot, on the face of things, seem to be any underlying conceptual connection between hard/soft policies and paternalism as such.

It has been, however, something of a feature of the new paternalism literature2 that paternalistic policies should be constructedso as to make minimal assault3 on individual liberty. And the conjecture is that there may be a relevant difference between ‘hard’and ‘soft’ policies on this front. Soft policies are ‘soft’, so the thought might go, precisely in that they give greater respect to theliberty of persons subject to paternalistic interventions. Even here, however, it is not clear why this issue should be relevant only inthe paternalism case. If individual liberty has independent4 normative status, then it presumably ought to weigh in policy choice inall cases. In other words, if ‘hard’ and ‘soft’ policies differ in the effect they have on individual liberty, then it is difficult to see whysuch differences would be relevant only in the case of “paternalistic” policies.

For example, a typical illustration of ‘soft’ policy relates to the distinction between opt-out and opt-in rules, in cases where thetransactions costs (at least, objectively measured) of opting are very low. A standard example of this case is the donation ofcadaverous organs for transplant purposes. The fact that opt-in and opt-out policies generate very different levels of organavailability is seen as evidence of the failure of standard models of rational choice; and the opt-out option is seen to present ameans of generating a larger supply of organs without serious objections on the libertarian front—a clear case of ‘soft’ policy inaction. Yet the beneficiaries of the scheme – organ transplantees – are not the agents whose organs are given up. This is ‘soft’ policy—but it is not especially connectedwith paternalism. An equally familiar example of ‘soft’ policy in action involves the same opt-in/opt-out distinction, but this time applied to superannuation schemes, where the primary beneficiary is the superannuant herself infuture periods. In this example, the scheme is paternalistic. But it would seem odd to say that the latter example involves anadvantage from a libertarian point of viewwhereas the former example does not: whatever liberty gain is secured in the provisionof an opt-out mechanism seems to be present equally in both examples.5

The issue with which we shall be primarily concerned here involves the claim that there are generalised efficiency reasons forpreferring ‘hard’ policies over ‘soft’. Clearly, if this is true, it is of some normative significance: in at least some cases, the liberty-advantages of ‘soft’ policies will have to be traded off against the efficiency advantages of ‘hard’ policies.6 This ‘efficiency’ claim hasemerged in various places in the literature—and specifically, in Glaeser (2006), Lowenstein and O'Donoghue (2006) [who Glaesercites] andHarrison (2008) [whocitesGlaeser]. In its simplest form, the reasoningbeginsby likening ‘soft’paternalism to an “emotionaltax” on the good that is over-consumed. The observation is then made that this emotional tax is one that generates no revenue. If thesame behavioural change were wrought by the hard ‘equivalent’ (namely a genuine tax that had the same behavioural effect) thentherewould be revenue generated; and this revenuewould be available for other purposes (includingmaking all those affected by theemotional tax better off). In other words, ‘cashing out’ the emotional tax in ‘hard’ form is a Pareto superior move.

A simple example may help to bed down the unusual nature of Glaeser's claim.7 Consider the simple demand and supplydiagram represented in Fig. 1. Imagine the government levies an excise tax on X. In the absence of income effects, the tax creates aloss in consumers' surplus represented by area ABCE. Since some portion of that amount is transferred to the government in termsof tax revenue, represented by ABCF, then the excess burden of the tax is represented by CEF. In this familiar setting the tax haswellknown distributional effects: consumers are worse off and the recipients of the tax revenue are better off. There is no reason whythe two groups of individuals need to be same. Equally, the tax also results in an efficiency loss—the loss to consumers exceeds the

2 Most notably perhaps in Thaler and Sunstein (2008) and the associated “nudging” literature.3 Better put, perhaps, the idea is to seek the optimal balance between paternalistically inspired welfare improvements and individual liberty—an objective to

which it is difficult to object. Note that this is not quite the same as “minimising the effects of paternalism on individual liberty”, which strictly would assignliberty lexical priority.

4 “Independent” that is from preference satisfaction—including any preference that individuals might have for liberty (their own or other people's).5 This is not to say that the cadaverous organ case and the superannuation case have equal implications for liberty in themselves. However, we are sceptical

that the libertarian calculus is decided by observing that the superannuation case is intrinsically paternalistic whereas the organ donation case is not.6 It is a complicated issue as to how this trade-off exercise might best be conducted—sufficiently complicated that we set it aside here.7 Glaeser takes the truths of his claim to be self-evident and does not offer any demand and supply explanation of his position.

Fig. 1. Welfare cost of an emotional tax.

602 G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

gain to the recipients of the tax revenue. In effect, the taxmoves the distribution of utilities inside the utilities possibilities frontier.All of this well known andwe only spell it out in order to set a frame of reference for Glaeser's alleged contribution on hard and softpolicies.

Now consider an emotional tax. It is Glaeser's contention that consumers are always made worse off by the emotional taxrepresented here as a loss of surplus by, say, area ABCE. Glaser also claims that the emotional ‘revenue’ is not transferred to thegovernment coffers. On the last point we agree. On this basis, Glaeser concludes that the net loss of the emotional tax is ABCEwhichis clearly greater than FEC. The emotional tax results in a distributional effect—consumers who bear the social disesteem are worseoff. But it is also evident from the simple social accounting exercise that there is an efficiency loss. The economy under theemotional tax ends up at a point further inside the utilities possibilities frontier than it would under a conventional tax. It is onthese grounds that Glaeser appears to mount a case for conventional for ‘hard’ over ‘soft’ policies.

The analysis raises, however more questions than it answers. Are emotional policies always analogous to per unit taxes,involving a negative income effect on consumers? And if so, must their impact always operate on both inframarginal andmarginaldecisions? Should emotional policies be modelled as crowding out hard policies? Are soft policies always akin to emotional taxesor can they be likened also to emotional subsidies impacting positively on the recipients? And if the latter, what are their impactson social welfare? How is the emotional ‘subsidy’ to be funded? Can emotional policies raise social welfare? Can the rhetoric ofpoliticians determine how citizens will perceive the impact of a soft policy?

In answering these questions we have found it useful to set out our analysis in terms of a simple model of late-arrivals at theIsraeli kindergarten in which the potential connections between the ‘esteem economy’ and the market for late-arrivals is laid barefor all to see. We believe there is considerable merit in setting out the argument where the effects of various effects are clear for allto see. We suspect that, for a goodmany of our fellow public choice travellers, it is hard to see past the anecdotal nature of much ofthe behavioural economics literature and discern the generalities. We think that considerable insight and understanding can begained by placing some of the tenets of behavioural economics in Marshallian garb. One can see, at the very least, how the variouspolicies are supposed to work; and see too something of the normative impact of the ‘esteem economy’ more generally.8

As part of our opening gambit, we claim that Glaser's “cashing out” claim is not in general valid. And indeed, we believe it to befairly obvious that this is so. To put the point in the language used earlier, if a ‘soft’ policy can be likened to “an emotional tax thatgains no revenue”, it can no less be likened to “an emotional subsidy that costs no revenue”! The critical issue then is whether the‘soft’ policy that secures the relevant behavioural adjustment serves to make the affected person worse off (the tax case) or betteroff (the subsidy case). As we shall argue below, that issue is not settled by the softness of the policy as such! In other words, there isno general presumption in favour of ‘hard’ over ‘soft’ policies of the kind that Glaeser, Loewenstein and O'Donohue and Harrisonsuggest.

That being so, we are left with two general questions: first, what determines whether a ‘soft’ policy operates as a tax or asubsidy? In other words, accepting that a ‘soft’ policy involves a substitution effect, what determines whether it has a positive or anegative income effect for affected agents? To make our refutation of the ‘efficiency’ claim persuasive, it will be necessary todevelop a fuller account of how ‘soft’ policies might be thought to affect behaviour. That discussion occupies Section 2. On the basisof this model, we examine the “cashing out” thesis in terms of a simple example, already familiar in the behavioural economicslexicon. That occupies Section 3. In Section 4, we consider two aspects of the operation of ‘soft’ policies and their relation to ‘hard’policies that we believe deserve clarification. The first is whether the subsidy/tax difference is determined by the rhetoric of the‘soft’ policy; the second is whether ‘hard’ and ‘soft’ effects are properly to be thought of as substitutes in the manner that theGlaeser/Harrison approach we criticise encourages. Section 5 offers some brief conclusions.

2. Soft policies

Soft policies are those that, as Glaeser puts it, do not change opportunity sets: they work instead on “beliefs and attitudes”.Glaeser indicates that, in his own discussion of ‘soft’ policies, he is going to focus on changes in beliefs. That seems on its face asensible focus. Policies that directly change attitudes – the assessment of the differential desirability of different goods, say – seemakin to changes in preferences as such. And the assessment from an efficiency point of view of preference change is a trickyexercise—one that seems to require meta-preference norms.9 If a government agency engages in some mass exercise in

8 We are not alone in holding such a position. In a recent paper Bruno Frey (2008) has attempted to set out how intrinsic motivation crowds outs extrinsicmotivation using Marshallian supply diagrams. Mark Harrison (2008) also attempts to use the Marshallian apparatus to discuss a number of differentpropositions in behavioural economics.

9 We say it is a tricky rather than an impossible exercise. There are basically two approaches to tackling the welfare economics of taste changes. One approach(Stigler and Becker, 1977) assumes that all rational actors share a common set of tastes or a “meta-utility function” and reinterprets changes in tastes as changesin the household production constraints used to produce satisfaction. In the framework all behaviour is explained by changes in constraints ruling out the need toinvoke any circular arguments based on preference changes. A variant of the no-change-in-fundamental tastes approach (see, for example, Brennan and Brooks,1980) is to assess the impact of changes in beliefs about the relationship between goods and the characteristics produced by these goods and the associatedchanges in behaviour. The second approach (for relevant arguments see the discussion in Schoeffler, 1952; Weisbroad, 1977; Dixit and Norman, 1978; Guttmanet al., 1992 and Cooter, 1998) allows for changes in tastes, arguing that a taste change is welfare improving if utility increases according to both the ‘initial’ and‘new’ utility functions. For a recent extended discussion of this approach see Bykvist (2010). Neither approach is free of problems. Becker himself (1996) hasretreated from his earlier position allowing some room for endogenous preferences to explain behaviour. Although this may be fine at the level of explaining andpredicting behaviour it is far from clear what is the welfare significance of such endogeneity. See, also Cowen (1989) for a discussion of some of the logicalproblems present in Stigler and Becker's approach. As for the second approach, it does not provide an unambiguous ranking of all sets of taste changes: SeeBykvist (2010) for a discussion of some of the difficulties.

603G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

persuasion, and manages to convince part of the populace that they would be better off exercising more regularly or eating lessfatty foods, it seems likely that, viewed in terms of their ex post preferences, the changed persons will see themselves to be betteroff than theywould have been if they had retained their former practices. (That is presumably what a preference change involves.)The Glaeser point seems to be that it would have been better in efficiency terms for the government to leave people with theiroriginal preferences and tax them to secure changes in their behaviour of an equivalent amount. But then it seems clear that theywould feel worse off by virtue of the imposition of the tax. The gains enjoyed by the revenue-users would be offset by the lossesendured by the taxed group. There will be no offsetting perceived benefit to the affected group just because the ‘hard’ rather thanthe ‘soft’ policy option has been chosen.

If instead we focus on changes in beliefs, it is easy enough to see how behavioural changes might be wrought by newinformation (or altered beliefs more generally), but not so easy to see how those changed beliefs would necessarily make thebelievers feel worse off.10 In short, it is simply not obvious how a ‘soft’ policy within the categories that Glaeser isolates could bethought of in the same terms as an “emotional tax”.

For this reason, we shall pursue the analysis in what follows in terms of a conception of ‘soft’ policy that invokes the effects ofsocial esteem.11 We do this for two reasons. First, the literature on esteem (Hollander, 1990 and McAdams, 1997) is sufficientlywell-developed analytically to allow us to borrow results from previous work (much of it, to be sure, our own—Brennan and Pettit(2004) Brennan and Brooks (2007a, 2007b). Second, the social esteem case seems more hospitable to the notion of an “emotionaltax”.12 An increase in the amount of social disesteem that falls on a particular practice seems rather like a tax in its two criticalfeatures: an increase in disesteem at themargin will create an incentive for the individual to cease the practice (or engage in it lessextensively); and the increased disesteem will reduce the individual's well-being in much the same way as a financial penaltymight.

It may of course be that rendering our analysis in esteem terms imports special and distorting features that limit ourconclusions and vitiate any critique of others' work (of Glaeser and Harrison in particular).We do not believe so. The issues that wesee as being central – the distinctions between margins and totals, and between income and substitution effects in the ‘soft’context – seem to us quite general13 and not in any way undermined by the esteem-based formulation. The appeal to the esteemcase is attractive to us essentially because it seems to us to offer a clear and analytically explicit way of illustrating the underlyinglogic.

3. The “cashing out” hypothesis

In a papermainly oriented towards the questionwhether lapses in rationality of the kind observed in the behavioural economicliterature are really hospitable to paternalistic policies, Glaeser (2006) also engages the question whether ‘hard’ paternalisticpolicies are in general preferable to ‘soft’ ones on efficiency grounds. He offers, in the process, as hisfirst argument (“Argument #1”)against ‘soft’ paternalism, the claim that “Soft Paternalism is an emotional tax on behavior that yields no government revenues”. CitingLowenstein andO'Donoghue (2006), he sees “education programs” designed tomake X less attractive, as analogous to an “emotionaltax” imposed on consumption of X. Crucially, however, such taxes are “non-revenue increasing taxes”. The “education programs”create “pure utility losses with no offsetting transfer to the government.” [p. 150]. Replacing the ‘soft’ policy with its behaviourallyequivalent ‘hard-policy’ analogue is directly welfare enhancing, because the ‘hard’ policy generates revenue that the ‘soft’ policy

10 Changes in beliefs can affect behavioural responses in one of two ways. First, a change in belief can affect the believer's perception of the commoditycharacteristics produced by goods, which will in turn result in a change in the budget constraint expressed in terms of characteristics. If an information campaignconvinces the believer that the goods he or she consumes are more (less) healthy than one initially thought, then the individual's frontier will expand (decline)and the believer's utility, as expressed in terms of the unchanged preferences over characteristics, can rise (fall). Second, a change in beliefs can directly result ina change in an individual's preferences. The believer can feel pride that one is making the correct choice in terms of the newly ‘enlightened’ preferences. Equally,the believer can suffer increased guilt at the poor choices one continues to make and thereby suffers a decline in utility as measured in terms of ex-postpreferences. Neither approach generates the conclusion that a ‘soft’ policy can be necessarily thought of in the same terms as an “emotional tax” because taxes,aside from the possibility of the so-called ‘diamonds are a government's best friend’ case, generally result in a decline in utility.11 The notion of social esteem used here is taken from Brennan and Pettit (2004). In their book-length analysis of the concept, they define esteem as anevaluative attitude and the fruit of such – good and bad – enters as an argument into the individual's utility function. Social esteem (disesteem), which makes theindividual better (worse) off, necessarily requires an audience of relevant individuals whilst self-esteem requires just oneself to be the spectator. Social esteem(social disesteem) is to be distinguished from, say, praise and applause (abuse and jeers), or more generally non-pecuniary transactions. In the case of socialesteem (disesteem) the individual holds the attitude that audience members by manner of the sheer presence would deem his or her behaviour to be estimable(disestimable). To take one of Philip Pettit's (1990, p. 746) colourful illustrations, the individual who is peering through a keyhole in a hall of a hotel suffers socialdisesteem – providing he or she is not shameless – if someone else should merely enter the hall because the individual believes the passerby must be thinkingthat such behaviour is contemptible.12 The following model of esteem/disesteem assumes that the individuals' beliefs are correct and preferences over goods and social esteem do not change. Wetherefore sidestep having to make a decision about whether changes in beliefs alter constraints or preferences and avoid the conundrums that can emerge in theset of models that treat belief changes as a change in tastes.13 Many of the arguments found in the new behavioural welfare economics dealing with paternalism raise themes that have been broached in the publiceconomics literature under the rubric of merit wants—though that earlier literature does not use the terms of ‘soft’ and ‘hard’ policies to frame the debate. See,Section 5.3 of Hillman (2009) where he examines some of the themes found in both the new behavioural economics and the orthodox public finance literatureon merit wants. Our paper does not directly deal with the merit goods literature because it is possible, as we indicated at the outset of the paper, to have so-called‘soft’ policies without paternalism being the motivation for the policies. Indeed, the issue of late arrivals at the kindergarten – in which we explicitly compare‘soft’ and ‘hard’ policies – seems to us to be situation where parents fail for various reasons to take into account the costs of their actions on others and not aproblem of paternalism.

604 G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

does not. Glaeser clearly regards the general claim here as self-evident: ‘cashing out’ the ‘emotional tax’ is itself directly welfareenhancing in aggregate.

A second instance of the same point is taken from a brief (and self-confessedly “simplistic”) analysis of a well-known“anomaly” in conventional economic theory—involving the introduction of a fee for late pick-up of children from a kindergarten.14

The introduction of the late-fee was found to increase the number of late pick-ups. Harrison (2008) explains this apparent anomalyby suggesting that the fee's effects in reducing the guilt-price associated with late pick-up are larger than the direct disincentive tobe late, associated with the fee itself. However, notes Harrison (2008), the substitution of a money price for the guilt price iswelfare-improving, in and of itself. The full price (guilt plus fee) paid by late parents goes down (explaining the increased amountof lateness); but the fee generates some revenue for the kindergarten, whereas the guilt generates only a psychic loss for theparents. Since no-one gains from the psychic loss as such,15 replacing the “emotional tax” by a payment that pays some (partial)compensation to kindergarten staff is itself welfare enhancing.

Both of these treatments take it as given that replacement of disesteem by cash is a good deal. But is this really right? Is theresult entirely general? And if not, on what does the result depend?

The first thing to emphasise in this connection is the distinction – familiar in economics circles – betweenmarginal and average(or total) magnitudes. What drives the behavioural change are marginal incentives; and what we can conclude from the fact ofbehavioural change (less X, or more late pick-ups) is something about those marginal effects. Strictly, we cannot infer anythingabout ‘averages’. This point is familiar from the ‘hard policy’ case in the externality context. The same marginal incentives can beestablished by a Pigovian tax on factory smoke or an equivalent per-unit subsidy for smoke abatement.16 The relevant substitutioneffects on the factory are the same; but the income effects differ according towhether the subsidy or tax is applied. Of course, in the‘hard policy’ case, it is typically easy to identify whether the tax or the subsidy is in play. In the ‘soft policy’ case, by contrast, theequivalent income effects are not self-evident.

Consider the late pick-up case. Norms of punctuality can be enforced by positive esteem associated with compliance to thenorm, no less than disesteem associated with violations. When the particular late-fee is introduced, the esteem associated withtimely pick-up of one's children is reduced: punctuality by parents is identified by observers not so much as an estimable sign ofconsideration for the kindergarten staff but rather as a desire to avoid financial penalty (not estimable!). So the positive esteemthat compliant parents enjoyed in the absence of the fee is reduced when the fee is introduced; and parents (rationally) complyless often. This description is entirely consistent with the behavioural change observed. But in this case, the fee serves not toreduce disesteem for violations but rather to reduce positive esteem for compliance: parents suffer a genuine loss of esteem fromthe fee and Harrison's “welfare conclusions” no longer go through. The increase in fee revenue to the kindergarten is not “free”: itcomes at the cost of reducing the positive esteem for compliance that punctual pick-up parents enjoyed.

Harrison's own diagram (reproduced with a number of substantial modifications as panel a of Fig. 2) is useful here in sortingout some of the relationships between marginal and average effects. First, consider Harrison's treatment of the “cashing out”hypothesis. The curve MBp represents the benefit to the parents from arriving late to pick up their offspring and MCK representsthe marginal cost to the kindergarten of late pick-ups. Harrison posits that parents bear a guilt price of P0 and the number of latepick-ups is initially L0. Harrison next imagines that the child-care introduces a late fee of fbP0,which as indicated putatively drivesout any guilt; and on those grounds Harrison supposes that the fee is welfare improving. Since the fee is too low, however, theproblem of late pickupsworsens and the kindergarten experiences an increase in costs. Whether there is an improvement in socialwelfare turns on whether the putative reduction in the value of guilt, measured by Harrison as the area P0·L0, outweighs theincrease in costs to the kindergarten, measured by the area under the marginal cost curve between L0 and L1.

But consider the esteem-based rendering of the demand and supply account of late pick-ups. The curves depicted in Panel bperform such a service for the case closest to what the behavioural economists seem to have in mind: that is, one where the initialprice emerges from the forces of disesteem. The total value of disesteem borne by the parents when there is no fee is representedin the fourth quadrant of panel b as JD||.17 Here the total value of disesteem as the parents arrive later and later to pick up theirchild increases, say, at an increasing rate. Over the range 0|J the mild degree of lateness is no great social transgression and parentsbelieve that there is only minor social disapproval from being slightly late.

Since we want to stress the importance of marginal and average incentives, it is useful to depict the slope of the total value ofdisesteem curve, JD||, at various degrees of lateness, as the marginal disesteem cost curve, KM, in panel b. The marginal disesteemcost is then redrawn in the demand and supply curves in panel a; and since there is initially no late-fee the marginal price curveintersects with demand to determine the equilibrium. At the initial equilibrium, L0, the marginal disesteem loss from lapses inpunctuality is P0 in dollar equivalents; and this is associated with a degree of lateness (however exactly measured) of L0.

In Harrison's treatment, after the fee of f is introduced, the fee obliterates disesteem effects altogether. But there is no need tomake this especially strong claim. So we proceed with a slightly more general treatment. After the late-fee is imposed, the totalvalue of disesteem curve falls to say JD|. Parents now hold the attitude that paying the late-fee assuages them of some of the social

14 The original treatment of the phenomenon is Gneezy and Rustichini (2000) though the case has been widely cited in behavioural economics circles.15 Though kindergarten staff benefit from the behavioural effects that parents' attempts to minimise the psychic loss induce. The basic idea here is the same asGlaeser's—that a substitution of fiscal for psychic tools (hard for soft) is welfare improving.16 Interestingly, Pigou's original factory/laundry example involved the subsidy possibility.17 In the interests of reducing the size of the diagram, the vertical scale of the lower panel is compressed relative to the vertical scale in the upper and middlepanels. And to reduce the complexity of the diagram, we have not depicted any individual's demand curve or individual's marginal disesteem cost curve. Themarginal disesteem cost curve that is depicted is the market disesteem cost curve and the total disesteem cost curve is the integral of the relevant area underthat market disesteem cost curve.

605G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

disesteem from being late. Themarginal disesteem cost from lateness is now represented by the flatter curve, RS in panel b and thefull marginal price (late-fee plus marginal social disesteem cost) is represented by the curve, TV, in panel a. The total marginal‘price’18 for lateness in the presence of the fee at the equilibrium is (P|+f)=P1. But by hypothesis, P0NP1, so the degree of latenessincreases to L1(NL0). The payment of the fee revenue of f·L1 is a benefit to the kindergarten; but that gain is matched by an equalpecuniary loss to parents.What remains of the impact on parents is the effect of the change in esteem/disesteem. But whether thatchange involves a loss or a gain to parents is an open question (aswe shall explain). In the case under consideration, the value of theloss of social disesteem falls after the introduction of the late-fee, (that is, from O|D2 to O|D1 as lateness increases from L0 to L1).19

It should be clear that what appears in the Harrison exposition as a gain in terms of social disesteem removed could (assuggested above) be as easily interpreted as a loss in social esteem enjoyed. The case of positive social esteem is presented in Fig. 3,which reproduces panel a and the first quadrant of Fig. 2. So, new to the basic diagram is panel c, which represents the relationshipbetween the total value of esteem and the degree of punctuality, here measured as the exact opposite of lateness. Punctuality hereis a source of positive social esteem; and arriving closer to the allotted time to pick up one's child yields more social approval. Oneaspect of this relationship is worth noting. Social esteem begins at O|| which corresponds to the degree of lateness L⁎bL. Thethought here is that if parents were so late that they started to follow a punctuality norm when the base degree of lateness is at L,defined as the point where the marginal benefit of lateness is zero, then they would have to take a substantial step in the directionof punctuality before they could reasonably hold the attitude that they were beginning to win some social approval. In the absence

18 In Harrison's treatment, P| is zero—the fee obliterates esteem effects altogether. But there is no need to make this especially strong claim. So we will proceedwith a slightly more general treatment.19 Fig. 2, by construction, reveals that the introduction of the late-fee results in an improvement in social welfare despite the increased tardiness of the parentsbecause the reduction in the loss from social disesteem exceeds the increase in costs to the kindergarten. There is no necessary reason, however, why theintroduction of the late-fee should improve social welfare when social disesteem is at work. If the rotation of the disesteem curve in panel b were much smallerthan depicted here, or the marginal cost to the kindergarten from lateness much larger, then there would be a reduction in social welfare as the reduction in theloss from disesteem would be outweighed by the loss to the kindergarten.

Fig. 2. Child care and social disesteem.

606 G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

of the late-fee, the total value of social esteem from punctuality is represented by say O||E||. The cost of being late therefore takesthe form of social esteem forgone. The advantage of the modelling approach taken here is that it is not necessary to introduce anyadditional curves into the basic supply and demand curves in panel a. As parents arrive later to pick up their children, the cost is agreater amount of social esteem forgone. The marginal disesteem cost of the first quadrant of Fig. 2 is simply relabelled as marginalesteem cost in panel b of Fig. 3 and the rest of the construction follows. The marginal price of lateness at equilibrium is P0 and theparents' degree of lateness is L0.

Although the behavioural and total price determination aspects of Figs. 2 and 3 are identical, the normative implications are ratherdifferent. In theHarrison exposition, there is a negative income effect from lateness in terms of social disesteemendured. The analysis ofFig. 3 alerts us to the opposite possibility: the imposition of the fee results in a loss of the positive esteem associatedwith punctuality.20

One important implication to be drawn from the analysis of Figs. 2 and 3 is that the “cashing out” hypothesis depends onwhether what is at stake is disesteem for violations or positive esteem for compliance—and we cannot induce the answer to thisquestion from the behavioural effects alone. Those behavioural effects depend, of course, on substitution not income effects in theesteem market!21 Whether substitution of ‘hard’ for ‘soft’ policy is welfare enhancing depends on whether the people who are

Fig. 3. Child care and social esteem.

20 How much esteem is at stake depends of course on the base point at which marginal esteem for punctuality disappears. We have taken this to be the pointL⁎; but any point between 3 and L1 would suffice. The normatively relevant point is that where the issue at stake is reduced positive esteem for punctuality, thereis an unambiguous loss associated with the fee.21 The normative significance of the late fee does not depend solely on whether there is social esteem or disesteem at play; the result also depends on whetherthere is an increase in lateness and its associated increase in social cost.

607G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

subject to esteem effects are better off or worse off by the esteem/disesteem enjoyed/endured. In the case of Fig. 3 there is a declinein the value of the social esteem associated with the late-fee from E2 to E1.22

In other words, whether a ‘soft’ policy is good or bad depends entirely on whether the ‘soft’ outcome is sustained by esteem ordisesteem except for one interesting case which we will explore below. The same behavioural effect can be secured by an increasein esteem for compliance or an increase in disesteem for non-compliance. Of course, we here follow Glaeser (and Harrison) inassuming that the emotional tax/subsidy is itself costless: this assumption is consistent with the esteem story to the extent thatesteem and disesteem are attitudes that are produced spontaneously and costlessly in theminds of observers. Esteem is somethingvalued by the persons who are its objects and disesteem is disvalued: but in both cases suppliers supply their attitudes of approvalor disapproval automatically.

Our general claim in the foregoing discussion is just that income and substitution effects in the case of ‘soft’ policies areindependent, just as they are in the ‘hard’ case.23 What one can induce from changes in behaviour are only the marginal“substitution effects”. Welfare comparisons of the kind at stake in the cashing-out hypothesis require claims about “incomeeffects”, and these cannot just be taken for granted.

Of course, as we have noted earlier, the esteem-based version of ‘soft’ policy is only one possible account of how ‘soft’ policiesmight operate—and may involve some special features. But we are reasonably confident that the same general results could beproduced by appeal to other psychological processes. If, for example, the “emotional tax” took the form of moral guilt for violatingthe punctuality norm, the “subsidy” could no less take the form of moral satisfaction at complying with the norm. We believe theappeal to esteem as themechanism driving behavioural change is an obvious and neat one; and has the analytical advantage that itbypasses the problems that beset analyses where there are preference/belief changes. Either way, the bottom line seems to be this:there is no general presumption in favour of ‘cashing out’ ‘soft’ policies.

The critical issue here is whether the ‘soft’ policy operates via changing positive or negative average incentives. The point canbe put more generally. Esteem is a matter of the more or less costless creation of attitudes in observers: (positive) esteem is anobject of desire that costs virtually nothing to produce.24 If a particular policy has the effect of increasing aggregate esteem across arelevant group, it is welfare enhancing; if it reduces aggregate esteem (or increases disesteem) it is welfare reducing. And thiseffect is independent of any behavioural changes induced by changes in esteem levels at the margin (which have to be evaluatedseparately).

On the basis of our conceptual rendering of the Glaeser/Lowenstein and O'Donoghue/Harrison claims in terms of our explicitaccount of social esteem, we are effectively alerted to a nest of questions of increasing generality:

First, how do policies (both ‘hard’ and ‘soft’), introduced for whatever reason, bear on the aggregate level of esteem?(question A) and second, what independent policies might be pursued with the direct objective of increasing theaggregate level of esteem across a community, assuming as Glaeser et al. do that such an increase is a good thing?25

(question B)

As indicated, the first question is a subset of the second. That second question is the general normative issue at stake. But tryingto answer it represents a larger challenge than it would be appropriate to engage here. Our task has been the more modest one ofdisposing of what we see as a misleading and generally false claim about the ‘cashing out’ of ‘soft’ policies. However, if in theprocess, the discussion serves to isolate the fundamental normative issue, that is not we believe a negligible accomplishment. Wemention the larger agenda to serve as a warning bell that the so-called efficiency argument in favour of ‘hard’ policies is but onepart of a much larger literature on liberty and public policy to which economists should perhaps devote their intellectual efforts.

In any event, rather than pursue this larger normative question, we wish instead to draw attention to a couple of aspects of theGlaeser et al. approach that deserve some further clarification.

22 Fig. 3 necessarily depicts the case where the introduction of the late-fee results in a deterioration in social welfare. Not only is there an increase in costs to thekindergarten there is also a decline in the value of social esteem from punctuality.23 It is entirely possible for there to be a marginal esteem effect without any average esteem effect. In such cases, the operative esteem standard is not a matterof off-on compliance but the degree to which the individual performs the standard better or worse than the average performer. The marginal esteem effect waitsin the wings of the equilibrium ready to support or suppress infra- or extra-marginal performance. If the marginal parent arrives earlier (later) than the averageperformer, then that behaviour is supported (suppressed) by the social esteem (disesteem) on offer. But at an equilibrium there is no incentive to changebehaviour because the loss in benefit from arriving too early outweighs the gain in social esteem (the social esteem forgone exceeds the gain from arriving evenlater). There is no average esteem effect. At the equilibrium the average parent gains no social esteem nor accrues any social disesteem. When there is a late-fee,being say more punctual is less esteem worthy and marginal esteem effects will provide an incentives for individuals to change their behaviour. But once a newequilibrium is established there will be no social disesteem (nor for that matter esteem) on offer because each parent will be behaving no worse nor better thanthe average.24 As is the case throughout economics, there are few free lunches. Individuals responding to esteem incentives will expend resources on performing betterthan average or complying with the norm such as arriving on time. Our statement that it is virtually costless to produce refers to the supply side of the esteemaccount. There is no necessary need for audience members to undertake any enforcement activity: their mere presence can be sufficient to generate the thoughtin the minds of the performers that they are being esteemed/disesteemed. It might seem as if our approach overlaps with Kirchgässner's (1992, 2010) analysis ofmoral behaviour when the rational actor on the demand side faces a low-cost condition. Not so. As we have just indicated, the only low cost aspect of our modelis that the attitudinal derivation of social esteem means that standards of behaviour can be enforced costlessly. For the esteemed/disesteemed decision maker theweight of perceived public opinion can be gloriously high/intolerably burdensome, but not necessarily a low cost.25 As already indicated we believe that what we say of ‘esteem’ here could be said equally of ‘moral satisfaction’. But some of the policy instruments that bear onesteem (e.g. changes in publicity, in anonymity, in perception of prevailing practices etc.) do not seem to bear on moral satisfaction at all.

608 G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

4. Two thoughts about policy and esteem

It might be thought that whether ‘soft’ paternalistic policy operates on the esteem or disesteem side of the ledger, isdetermined by the rhetorical focus of the policy itself. A ‘soft’ policy that stigmatises obese individuals increases disesteem forobesity, while a ‘soft’ policy that exalts the virtues of being “slim, fit and elegant” operates via increasing positive esteem. Theformer is framed more or less as an “emotional tax”; the latter as an “emotional subsidy”. Or so the thought runs.

However, the rhetorical focus of the policy – though not irrelevant – is also not determinative. A ‘soft’ policy that exaltsslimness may in fact work primarily by increasing disesteem for obesity; and a ‘soft’ policy that stigmatises obesity may workprimarily to increase esteem for slimness. The ‘economy of esteem’ has a logic of its own that is not driven exclusively (or perhapseven predominantly) by government policies or the particular rhetoric used to defend them. Soft policies can serve to increase orreduce the effect of esteem incentives at the margin—but they cannot necessarily determine the effects on aggregate esteem/disesteem.

In a more extended treatment of the relation between esteem incentives and norms (Brennan and Pettit (2004) Ch. 7) thesuggestion is made that, whether positive esteem or disesteem is the primary mechanism in relation to compliance with a well-defined norm of conduct, is likely to be a function of the prevailing level of compliance. If compliance is routine, then non-compliers are outliers and tend to be disesteemed for their non-compliance. If non-compliance is routine, then compliers tend toderive positive esteem. This proposition is connected to the general thought that observers' reactions to observing some action isrelated to what the observers expect. If the actor performs better than expected in some normatively relevant domain, the actortends to be esteemed; if worse than expected, the actor tends to be disesteemed.26

Doubtless, reality is more complicated than this; but if there is any truth to that conjecture, it immediately suggests that therhetorical orientation of government ‘soft policies’ will not be sufficient to determine whether the policy actually operates byincreasing positive esteem for compliance or negative esteem for non-compliance. If obesity is common, then people who are slimwill tend to be esteemed; if slimness is common, then the slim will receive less esteem, but the obese will be subject to moredisesteem. And this holds, whatever the precise nature of policies that serve to make person-size more salient.

The second thought relates to the manner in which the comparison between ‘hard’ and ‘soft’ policies is framed. It is for certainpurposes analytically convenient to treat ‘hard’ and ‘soft’ policies as alternative mechanisms for achieving the same policyoutcome. In that way, ‘hard’ and ‘soft’ are conceptualised as direct alternatives—and analysed in terms of ‘behavioural equivalents’.So it seems natural to focus analysis on the effects of substituting for a ‘soft’ policy a ‘hard’ policy that has the same behaviouraleffects.

But one of the general messages of “rational choice political theory” is that the same social influences that are operative inmarkets apply to politics. And this fact makes the choice of what can be taken as ‘exogenous’ in the policy process a problematicissue. Glaeser, for example, rightly emphasises that government agents and political processes more generally are not exemptfrom the failures of rationality that are taken to justify paternalistic policies. But one might equally make that point in relation tothe factors that generate esteem and disesteem. That is, the kinds of widespread social attitudes that give rise to esteem/disesteemeffects are present more or less equally in markets and politics. And this fact makes the relation between ‘hard’ and ‘soft’ policiesdecidedly tricky. Glaeser recognises this complication when he warns that ‘soft’ paternalistic policies may breed ‘hard’ ones. But ofcourse the reverse is no less likely. When government legislates against smoking in public places, the effect can be to confirm anti-smoking attitudes that were previously somewhat ill-formed: the law makes it common knowledge that most people disapproveof smoking or that an expert body (or some organisation otherwise authorised) thinks that smoking is bad for people. Thisendorsement may well support the judgement that people who continue to smoke are variously weak-willed, or dirty, or in someother way deserving of contempt. The literature on the “expressive” functions of the law (say, Van der Burg (2001) or Dharmapalaand McAdams (2003)) for example, is essentially concerned with the way in which law can embed social norms and amplify thesocial mechanisms (esteem and disesteem largely) whereby those norms are enforced. In this case, then, a ‘hard’ policy measurecan give rise to ‘soft’ effects that augment behavioural consequences; and vice versa.

In the particular example investigated by Harrison, it does appear that ‘hard’ policy ‘drives out’ ‘soft’ effects at least at themargin. In much the same way, Bruno Frey's (1997) treatment of market-like incentives and social suasion as alternativemechanisms for inducing reluctant children to mow the lawn or eat their vegetables (or whatever) – and by extrapolation, of thepossible consequences for intrinsic rewards of market devices – suggests that market-devices (increased taxes) and social suasionare substitutes. Doubtless, this can sometimes be the case. But no less often, ‘hard’ and ‘soft’ policies seem likely to becomplementary. It is for example implausible to believe that a prominent legal official who is found guilty of falsifying evidenceand imprisoned, will suffer no further loss of social disesteem simply because the judge passes an especially harsh ‘hard’ sentence.The hard sentence can operate simply as a signal that what the official has done is especially heinous. Similarly, politicaljustification for hard policies will often require rhetorical defence that amounts to ‘soft’ policies, and policies that focus oninfluencing popular opinion might well require a hard policy to show that the government itself is ‘serious’.

In general, the terms of any such substitution between ‘hard and soft policies’ (e.g. how much marginal esteem effect isassociatedwith a dollar's increase in tax/spending) and indeedwhether there is any such substitution –whether, that is, the publicpolicy response serves to magnify or diminish esteem/disesteem effects – are matters that we might expect to vary from case tocase.

26 In Brennan and Brooks (2007b) we attempt to indicate how the two issues of aggregate esteem value and behavioural benefit might be integrated in a singleanalysis.

609G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610

The bottom line is that there seem to be no general grounds for assuming that a change in incentives attributable to fiscaleffects leads to a change in esteem-related incentives in exactly the opposite direction. In that sense, there is no general licence forthinking of ‘hard’ and ‘soft policies’ as substitutes.

5. Conclusions

Some individuals working out of behavioural economics have begun to make strong claims about the policies that ought to beimplemented by government.27We agreewith Glaeser's general position that such claims are under-argued—especially in relationto the implied comparison betweenmarkets and political processes. Intuitions, unconstrained by any explicit account of how ‘softpolicies’might work, have played too great a role in the lessons drawn so far.We have here attempted both to offer a simplemodelof how ‘soft policies’might work and use that model to examine the claim that ‘hard policies’ are always preferred to ‘soft policies’on efficiency grounds, at least as far as aggregate revenue effects are concerned.28 Our analysis suggests the strong claim for ‘hard’policies is not generally valid. Moreover, there is no general licence for thinking of ‘hard’ and ‘soft policies’ as substitutes; nor anyobvious reason to believe that governments can by mere rhetoric determine whether soft policies work by increasing positiveesteem or disesteem. The ‘economy of esteem’ has a logic of its own. And as we argued at the outset, there seems to be someconfusion abroad about the way in which ‘soft’ policy, libertarianism and paternalism connect.

The more general lesson from the analysis here is simple—but, we believe, interesting and important. In policy analysis, ifprediction of behavioural response is what is at stake, then anymodel that predicts the marginal effects correctly is presumptivelyacceptable. In particular, it simply does not matter whether agents are modelled as responding to a tax or to a subsidy forgone. Butwhen it comes to welfare analysis, aggregate income effects can be important. So, for example, the normative significance of theintroduction of a late-fee depends on whether the late fee increases, reduces or leaves unchanged aggregate esteem—and wecannot induce the answer to this question from marginal effects alone!

Acknowledgements

We are indebted to Arye Hillman and three anonymous referees for helpful comments on a previous version of the paper.

References

Becker, G., 1996. Accounting for Tastes. Harvard University Press, Cambridge, MA.Brennan, G., Brooks, M., 1980. On information and satisfaction. Southern Economic Journal 47, 1157–1162.Brennan, G., Brooks, M., 2007a. Esteem-based contributions and optimality in public goods supply. Public Choice 130, 457–470.Brennan, G., Brooks, M., 2007b. Esteem, norms of participation and public goods supply. In: Baake, P., Borck, R. (Eds.), Public Economics and Public Choice:

Contributions in Honor of Charles B. Blankart. Springer-Verlag, Berlin, pp. 63–80.Brennan, G., Pettit, P., 2004. The Economy of Esteem: An Essay on Civil and Political Society. Oxford University Press, Oxford.Bykvist, K., 2010. Can unstable preferences provide a stable standard of well-being? Economics and Philosophy 26, 1–26.Cooter, R., 1998.Models ofmorality in law and economics: self-control and self-improvement for the “badman” of Holmes. BostonUniversity LawReview78, 903–930.Cowen, T., 1989. Are all tastes constant and identical?: a critique of Sigler and Becker. Journal of Economic Behavior and Organization 11, 127–135.Dharmapala, D., McAdams, R., 2003. The Condorcet jury theorem and the expressive function of law: a theory of informative law. American Law and Economics

Review 5, 1–30.Di Tommaso, M., Shima, I., Strøm, S., Bettio, F., 2009. As bad as it gets: well-being deprivation of sexually exploited trafficked women. European Journal of Political

Economy 25, 143–162.Dixit, A., Norman, V., 1978. Advertising and welfare. Bell Journal 9, 1–17.Frey, B., 1997. Not Just for Money: An Economic Theory of Personal Motivation. Edward Elgar Publishing, Cheltenham UK.Frey, B., 2008. Motivation crowding theory—a new approach to behaviour. Productivity Commission, Behavioural Economics and Public Policy: Roundtable

Proceedings. Productivity Commission, Canberra Australia, pp. 37–54.Glaeser, E., 2006. Paternalism and psychology. University of Chicago Law Review 73, 133–156.Gneezy, U., Rustichini, A., 2000. A fine is a price. The Journal of Legal Studies 29, 1–17.Guttman, J., Nitzan, S., Spiegel, U., 1992. Rent-seeking and social investment in taste change. Economics and Politics 4, 31–42.Harrison, M., 2008. Discussant. Productivity Commission, Behavioural Economics and Public Policy: Roundtable Proceedings. Productivity Commission, Canberra

Australia, pp. 55–62.Hillman, A.L., 2009. Public Finance and Public Policy: Responsibilities and Limitations of Government, Second edition. Cambridge University Press, Cambridge UK.Hollander, H., 1990. A social exchange approach to voluntary cooperation. The American Economic Review 80, 1157–1167.Kirchgässner, G., 1992. Towards a theory of low-cost decisions. European Journal of Political Economy 8, 305–320.Kirchgässner, G., 2010. On minimal morals. European Journal of Political Economy 26, 330–339.Lowenstein, G., O'Donoghue, T., 2006. “We can do this the easy way or the hard way”: negative emotions, self-regulation and the law. University of Chicago Law

Review 73, 183–206.McAdams, R., 1997. The origin, development, and regulation of norms. Michigan Law Review 96, 338–443.Pettit, P., 1990. Virtus normativa: rational choice perspectives. Ethics 100, 725–755.Schoeffler, S., 1952. Notes on modern welfare economics. The American Economic Review 42, 880–887.Stigler, G., Becker, G., 1977. De gustibus non est disputandum. The American Economic Review 67, 76–90.Thaler, R., Sunstein, C., 2008. Nudge: Improving Decisions about Health, Wealth and Happiness. Yale University Press, New Haven.Weisbroad, B., 1977. Comparing utility functions in efficiency terms, or, what kind of utility functions do we want? The American Economic Review 67, 991–995.Van der Burg, W., 2001. The expressive and communicative functions of law, especially with regards to moral issues. Law and Philosophy 20, 21–59.

27 See Thaler and Sunstein (2008) for an extraordinarily broad sweep of policies founded on the principles of behavioural economics. Glaeser's paper wassupposed to serve as a warning about the rise of behavioural welfare economics associated with Loewenstein and O'Donoghue amongst others. As we haveargued in this paper, one of Glaeser's central critiques is ill-directed. We are however sympathetic with the broad thrust of Glaeser's more general critique.28 See Di Tommaso et al. (2009) for an econometric analysis of ‘soft’ and ‘hard’ policies, involving the capabilities welfare approach, in the context of sexuallyexploited women.

610 G. Brennan, M. Brooks / European Journal of Political Economy 27 (2011) 601–610