How Behavioral Economics Can Shape Firm Strategy and Public Policy: Lessons from the Field and Laboratory

Citation

Chao, Matthew C. (2015) How Behavioral Economics Can Shape Firm Strategy and Public Policy: Lessons from the Field and Laboratory. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/Z9FJ2DQW. https://resolver.caltech.edu/CaltechTHESIS:05282015-050921863

Abstract

Incentives are not always economic or monetary in nature. Individuals are often influenced by socially-based incentives centered on how he or she wants to be perceived in a social setting, such as the desire to publicly adhere to a norm of fairness. Likewise, individuals can also be influenced by cognitively-based incentives centered on self-perception and self-attribution, such as the desire to convince oneself that he or she is altruistic. Behavioral economists have incorporated some of these concepts into standard economic models of decision-making, but there is much we still do not understand about the role of these psychology-based incentives in organizational strategy and public policy contexts.

This thesis examines the effects of several social and cognitive incentives across different settings. In Chapter I, I use a laboratory experiment to examine why individuals feel the need to reciprocate to gifts and favors, even when those gifts are from businesses looking to take advantage of our tendency to reciprocate. Specifically, I demonstrate that individuals reciprocate simply to the intent to give a gift or favor, regardless of the ulterior motives or actual utility resulting from the favor. In Chapter II, I use observational data to investigate how pharmaceutical firms exploit social incentives that invoke reciprocity in order to influence how physicians prescribe. I concurrently examine how regulators also use social incentives, but as a way to protect consumers from these manipulative marketing strategies. In Chapter III, I collaborate with a non-profit public radio station to test the interaction between psychological and economic incentives in a fundraising context. In particular, Chapter III uses a field experiment to show that economic incentives in a fundraising campaign can reduce donation rates by detracting attention from the psychological reasons for donating, and thereby inducing a different mindset in donors.

This thesis builds upon the field of behavioral economics in two ways. First, it uses experimental methods to extend our theoretical understanding of non-monetary, psychological incentives, including some of the mechanisms that drive reciprocity, social image, and motivation crowding out. Second, the thesis applies this knowledge toward understanding the effects of several commonly used marketing campaigns and regulatory policies.

Thesis Files