Why Do Labels Work? A Theoretical Analysis and Proposed Test Design of Mechanisms Underlying Labeled Cash Transfers


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Why Do Labels Work? A Theoretical Analysis and Proposed Test Design of Mechanisms Underlying Labeled Cash Transfers

Barcelona GSE Master Project by Angela Bouzanis, Victoria Gonsior, Rozália Kepes , Eva Werli

Master Program: Economics

About Barcelona GSE master programs: http://j.mp/MastersBarcelonaGSE

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Why Do Labels Work? A Theoretical Analysis and Proposed Test Design of Mechanisms Underlying Labeled Cash Transfers

  1. 1. MASTER PROJECT Why Do Labels Work? A Theoretical Analysis and Proposed Test Design of Mechanisms Underlying Labeled Cash Transfers Written by: Angela Bouzanis (U100995) Victoria Gonsior (U100989) Rozália Kepes (U101000) Eva Werli (U100974) Program in Economics 2013/2014
  2. 2. 1 ABSTRACT Labeled Cash Transfers (LCTs) are Unconditional Cash Transfers (UCTs) with a specific label attached stating the purpose of the cash transfer in order to guide recipients in allocating funds. Recent economic research has provided evidence for the efficiency of LCTs, but the literature is still missing theoretical foundations. In this paper, we propose four mechanisms based on behavioral economics that have the potential to explain why LCTs work. We construct a theoretical framework for designing labels based on (1) mental accounting, (2) lying aversion, (3) social norms, and (4) informational updates. Additionally, we put forward a randomized controlled trial (RCT) with four treatments according to these four theories in order to test which of these mechanisms have a significant effect on educational outcomes. While at this stage we cannot analyze results, we present our identification strategy and address some general issues and specific concerns regarding our experiment.
  3. 3. 2 TABLE OF CONTENTS Abstract .................................................................................................................................................... 1 1. Introduction ....................................................................................................................................... 3 2. A Recent Field Experiment from Morocco ............................................................................... 4 3. Incorporating “Framing Effects” in Randomized Controlled Trials ................................ 5 3.1 General Design and Control Group ..................................................................................................... 6 3.2 Mental Accounting .................................................................................................................................... 7 3.3 Lying Aversion ........................................................................................................................................ 11 3.4 Social Norms ............................................................................................................................................ 15 3.5 Information: Making Education Salient ......................................................................................... 18 4. Identification Strategy ................................................................................................................. 19 5. Concerns & Issues .......................................................................................................................... 21 6. Conclusion and Areas for Further Research ........................................................................ 24 References ............................................................................................................................................ 25 Authorship ........................................................................................................................................... 28
  4. 4. 3 1. INTRODUCTION A recent movement among economists and policy makers aspires to steer behavior in welfare promoting directions while ensuring citizens’ freedom of choice by designing a context in which they make decisions instead of decisions being made for them. This change in thinking has specific applications in Development Economics, where often individuals are only rewarded for ‘good’ behavior, as defined by a policy maker. A prime example of such "Libertarian Paternalism" (Thaler & Sunstein, 2003) is the recent shift from Conditional Cash Transfers (CCT) to Labeled Cash Transfers (LCT) in developing countries. In this paper we endeavor to analyze the behavioral mechanisms underlying LCTs, and to propose ways in which they might be improved. Conditional, Unconditional, and Labeled Cash Transfers are incorporated in various countries’ poverty alleviation strategies most frequently in order to provide poor families with money to be invested in healthcare and education. The two standard features of CCTs are targeting and conditionality, both of which might create a beneficial structure of the program. However, CCTs may come at large monetary costs, potentially exclude the poorest segments of the population, and limit freedom of choice (Caldes, Coadz & Maluccio, 2006; Alatas et al., 2012). Unconditional Cash Transfers (UCT), on one hand, minimize distortionary effects, reduce welfare losses, and maintain freedom of choice. On the other hand, critics strongly point to issues related to limited viability due to higher monetary burdens (Case and Deaton, 1998). An LCT could potentially address the drawbacks and limitations of CCTs and UCTs while preserving their benefits with respect to the incentive structure favoring human capital investment. Attaching a label to UCTs ensures freedom of choice, but at the same time steers the target group’s behavior in a welfare promoting direction. A recent randomized controlled trial (RCT) by Benhassine, Devoto, Duflo, Dupas, & Pouliquen (2014) compares CCTs and LCTs aimed at improving educational outcomes in primary schools in Morocco, and provides empirical evidence in favor of LCTs. They find that LCTs not only increase school participation by 7.4 percentage points relative to a control group receiving no cash transfer, but this increase is also significantly 2 percentage points higher than the increase that a CCT induces. Taking these results, the present paper does not question whether LCTs work. However, a theoretical
  5. 5. foundation explaining behavioral mechanisms through which LCTs function is absent in the existing literature. Deaton (2010) argues that “RCT-based evaluation of projects, without guidance from an understanding of underlying mechanisms, is unlikely to lead to scientific progress in the understanding of economic development.” Recognizing this lack of theoretical foundation, in the present paper we propose four mechanisms based on behavioral economics that have the potential to explain why LCTs work. More specifically, we focus on (1) mental accounting, (2) lying aversion, (3) social norms, and (4) informational updates. Additionally, we put forward a RCT with four treatments according to these four theories in order to test which of these mechanisms have a significant effect on educational outcomes. The paper is structured as follows. In section two, we summarize Benhassine et al.’s (2014) recent field experiment from the LCT program in Morocco. In section three, we explain the four behavioral mechanisms potentially underlying LCTs, and develop the RCT aimed at testing and comparing the effects of these theories. In section four we present the identification strategy, and in section five we address some general issues and specific concerns about our experiment. Finally, in section six we conclude. 4 2. A RECENT FIELD EXPERIMENT FROM MOROCCO For the year 2007/2008 the Moroccan Ministry of Education (MEN) estimated that “over 90% of rural children started primary school, but 40% dropped out before completing the full six years of primary education” (Benhassine et al., 2014). To address the issue, the MEN proposed a nationwide cash transfer program, Tayssir. 320 rural primary school sectors were selected for the pilot project. The school sectors were assigned randomly to one control group (no cash transfer) and four treatment groups: LCT-to-fathers, LCT-to-mothers, CCT-to-fathers and CCT-to-mothers. The Tayssir program involved cash payments to parents of children of primary school age (6-15 years). Monthly transfers were between 60 MAD (US$8) and 100 MAD (US$13) and increased with the child’s age, irrespective of the subgroup. In the LCT version of the program transfer receipt depended neither on actual school attendance nor on continued enrollment. Instead, parents only had to enroll their children in the Tayssir program, which had been
  6. 6. advertised previously using flyers. In the CCT version of the program, transfers were conditional on attendance. The study, therefore, compares “CCTs to cash transfers that are unconditional but labeled as being a child education benefit” (Benhassine et al., 2014). The analysis shows that at the end of the second year the program increased school participation by approximately 7.4 percentage points in the LCT-to-fathers group as compared to the control group (with no cash transfer). Furthermore, the increase in school participation is about 2 percentage points higher (significantly on the 1% level) in the LCT compared to the CCT program. The greater school participation effects in the LCT treatment group mainly result from significant differences in re-entry rates. The study reveals no significant differences in attendance rates among the treatment groups during the period covered by unannounced visits, although mean attendance rates are generally high (approximately 95.5% in the control group). These results are of particular interest since CCTs were only disbursed conditional on school attendance. While at a first glance the reader could hypothesize that the success of the LCTs at least partly came from the parents’ failure of understanding the lack of conditionality, conducted awareness studies reveal that, although understanding was weak initially, by the second year of the study “over 80% of parents in the LCT communities had understood that the program was unconditional” (Benhassine et al., 2014). Moreover, the study shows that the LCT program had significantly stronger effects on “marginal children”: girls, young children, and children of lower ability. In general, the study provides evidence that in some contexts “Unconditional but Labeled Cash Transfers targeted at poor communities can provide parents with the small nudge necessary to increase attendance” (Benhassine et al., 2014). Since transfers are relatively small and administrative costs low, the nudge is in comparison relatively inexpensive. 5 3. INCORPORATING “FRAMING EFFECTS” IN RANDOMIZED CONTROLLED TRIALS In this section we present four potential underlying mechanisms that could explain why Labeled Cash Transfers work. Based on behavioral economics, the four mechanisms are (1) mental
  7. 7. accounting, (2) lying aversion, (3) social norms, and (4) informational updates. Additionally, we develop the basic outline for a hypothetical RCT with four treatments according to the four theories. The objective is to create a trial in which it will be possible to evaluate which of these theories have a significant effect on the success of a LCT, which one is the strongest mechanism, and how they could be used to further improve compliance rates. 3.1 GENERAL DESIGN AND CONTROL GROUP The RCT we propose would assess the impact various labels in a LCT may have on school enrollment and attendance rates in a developing country.1 Before any intervention, we randomly assign participating villages into four treatment groups and one control group, and conduct a baseline survey in order to measure baseline school enrollment and attendance rates as well as possible heterogeneity among experimental groups. Then, all eligible households with school-age children in the treatment and control groups receive a flyer detailing the upcoming cash transfers. All flyers contain information regarding the transfers’ unconditionality, however, exact wording will change depending on the treatment, as will be explained later. The transfers are relatively small in comparison with most CCTs and do not represent a large transfer of wealth for the household. Distribution takes place at the household level and we assume that families behave according to the theory of unitarian households. Cash transfers are issued by the country’s government or Ministry of Education and can be picked up by eligible households from the nearest post office.2 Following Benhassine et al. (2014), the experiment runs for at least 2 years, and then the outcome variables, i.e. school enrollment and attendance rates, are measured again. Awareness surveys would be conducted to ensure families understand the nature of the program. In the control group, families with school age children are informed that a new government program will provide eligible households in their district with a small monthly UCT. This is a 1 It is important to mention that in this section we provide a very general design, and we will address specific issues that particular countries might have in section five. 2 The distribution of the cash transfers through post offices is chosen because some recipients might not have a bank account and this form of access to the transfer has been effective in prior RCTs (e.g. Benhassine et al., 2014). 6
  8. 8. standard UCT without a label attached. The change in school attendance and enrollment rates in this group will be used to monitor the income effect of providing households additional monetary resources. Economic theory predicts that the additional income from the cash transfer should be spread across different areas of consumption and time. Therefore, we expect that giving families cash would have a very small effect on school enrollment. Further, this group will be used to ensure that any other reasons for increasing enrollment rates separate from our experiment are controlled for, including families changing preferences over time. 7 Label (1): Control Group Starting next month all parents of school age children in your area are eligible to receive a small monthly cash transfer from the government as part of a new social program. You can pick up the transfer from your nearest post office upon presenting a national ID card. It is crucial to emphasize that families with school age children in all groups, including the control group, are eligible for the cash transfer. Therefore, if we observe systematic differences in the post-treatment outcome variables across the five groups then, assuming the randomization was done correctly, the only reason can be the content of the label. While at first one might doubt whether a simple alteration in the wording of a letter could incentivize people to change their behavior, as the next sections will show, there are numerous field studies that prove it is possible. 3.2 MENTAL ACCOUNTING The first mechanism which could explain why Labeled Cash Transfers work is that labeling possibly facilitates mental accounting. According to standard economic theory, money is fully fungible. Any unit of money is a perfect substitute for another unit of money, irrespective of its origin or intended usage. Households maximize their utility subject to a budget constraint where money enters in form of income or wealth as an aggregate variable. Richard Thaler (1980) challenged this theoretical view by introducing the concept of mental accounting. Mental accounting is broadly defined as the set of cognitive operations used by households to categorize and regulate their financial activities. Money is no longer fully fungible but mentally separated according to different economic categories. Households organize several mental accounts according to the source of money (e.g. gift or hard-earned), the intended use of money (e.g.
  9. 9. normal or luxury), the flow of money (e.g. regular or windfall) or whether money enters in form of gains or losses (Thaler, 1999). One form of this cognitive version of cost accounting is the assignment of mental accounts and the division of the total budget to different expenditure categories (e.g. food or housing) (Heath & Soll, 1996). Households track their expenses against every distinct category and once the budget in an account depletes, future consumption will less likely be allocated to this expenditure category. Here, mental accounts are defined by the destination of money. This specific form of categorization is called mental budgeting (Antonides, Groot & Van Raaij, 2011). Mental accounting is assumed to influence households’ consumption behavior. According to standard economic theory, unitary households maximize their utility function U(x) over a vector of different goods xi=(x1,x2,...,xn) given a corresponding price vector pi=(p1,p2,...,pn) and income w. The maximization problem is presented as follows: 8 max ! 푈(푥!, 푥!,…, 푥!) ! 푠. 푡. 푝!푥! = 푤 !!! Income w is assumed to be fungible. We will extend this standard model on the basis of the mental budgeting theory such that different goods xi will be grouped into m different mental expenditure categories θj with j ϵ (1, m) and m<n. These expenditure categories form distinct subsets of the original set of goods xi. Income w is no longer fungible but will be split up and assigned to the different expenditure categories: 푤! = 푤 ! !!! Without any loss of generality we will model the case of two expenditure categories θ1 and θ2. Goods xi belong to expenditure category θ1 if i<δ, with δ being a real number between 1 and n, while the rest of goods xi belong to category θ2. The household’s choice about the partitioning of the total income w into w1 and w2 is taken as given.
  10. 10. 9 The new maximization problem is given as: max ! 푈(푥!,…, 푥!, 푥!!!,…, 푥!) 푠. 푡. 푝!푥! = 푤! ! ! !! 푎푛푑 푝!푥! = 푤! ! ! !! In this model, households are “boundedly rational consumers” who act as if they were credit constrained (Goenka, 2003). The necessary and sufficient condition for optimization within each group is that preferences are weakly separable (Deaton & Muellbauer, 1980). If we go one step further and additionally assume that preferences are additively separable across expenditure groups, we can simply split up the maximization problem into the two expenditure groups and solve them separately. The originally “boundedly rational consumer” could be therefore split up into two “quasi-rational” consumers who each maximizes the utility function over one category according to the respective budget constraint (Goenka, 2003). This simple model shows that if income in one of the mental budgets increases, it only affects the optimal consumption choice of one of the two “quasi-rational” consumers. Therefore the optimal consumption choice changes only within an expenditure category. The model does not endogenize the choice of the distribution of total income into different budgets. Instead this distribution is taken as given. The choice could have been made according to some specific criteria in the past and is now being held fixed. Empirical and experimental research supports the hypothesis that the actual usage of income depends on the mental budget in which it is framed. O’Curry (1996) showed that if individuals initially allocate money mentally to a good within an expenditure category, they are more likely to spend this money within the same category if the good is unavailable or cheaper than expected. Further experiments have shown that people want to spend less in a particular category when their budget in this category becomes exhausted (Heath and Soll, 1996). Notwithstanding, mental accounts are in reality not as fixed as in our simple model, but people can manage their mental budgets with greater flexibility and transfer money from one account to the other (Cheema & Soman, 2006).
  11. 11. According to the concept of mental accounting, an effective way of channeling cash transfers is to guide the recipient’s mental accounting such that he or she enters it to the specific mental budget it is intended to be spend on. Regarding the general setting of our RCT and the goal to increase educational outcomes, the cash transfer should be designed such that parents perceive it as a positive income shock to the mental budget ‘Children’s Education’. The probability that this additional income will be spent on goods within the ‘Children’s Education’ category (e.g. school fees or uniforms) should thus increase. A successful transfer into a specific mental budget could come at small costs because less money would be diverted to other expenditure categories. Literature suggests that external labeling or framing of money can have an impact on the mental labeling and budgeting of individuals. Slovic (1972) examined information-processing in the context of individual decision making and first proposed the “concreteness principle“. It states that individuals will use the information they receive in the context of the frame it is displayed and tend to not reframe it. Research showed that individual preferences shift when the decision problem is framed differently (Tversky & Kahneman, 1981). Empirically, Kooreman (2000) presented that the sensitivity of spending on children’s clothing is higher with respect to changes in child allowances than to different income sources. However, other studies by Edmonds (2000) in Slovenia and by Blow, Walker and Zhu (2006) in the United Kingdom could not find empirical support for this labeling effect of child benefits. In a more controlled setting, Cheema and Soman (2009) examined the effects of labels on the decision making of households who aimed to save money for their children’s future. They found that in this case the savings rate of very low income parents nearly doubled when they labeled the earmarked savings with pictures of the household’s children. An effective label could hence act on the household’s mental budgeting process and steer the allocation of the provided cash transfer into the desired mental account. Households will then change their consumption decision intrinsically according to their new budget constraint. In case of normal goods, expenditure should increase within the goods of the specific category. While Benhassine et al. (2014) recognize that a mechanism associated with mental accounting might be at work when evaluating the outcome of their intervention, they do not have the possibility to specifically test for it. Hence, we suggest for the design of our first treatment group the incorporation of a label aiming at addressing the theory underlying the idea of mental 10
  12. 12. accounting. More specifically, the label incorporated in the design of the flyer explicitly states the mental budget the cash transfer is intended for: ‘Children’s Education’.3 This implies that a LCT can be successful in increasing enrollment rates if the label induces the households to mentally categorize the money to the account for children’s education. 11 Label (2): Mental Accounting Starting next month all parents of school age children in your area are eligible to receive a small monthly cash transfer from the Ministry of Education as part of a new social program to increase school enrollment. This money is being given to you to invest in the education of your children. You can pick up the transfer from your nearest post office upon presenting a national ID card. 3.3 LYING AVERSION The second theory we propose that might explain why LCTs work is based on lying aversion. Accumulating evidence that suggests people are averse to lying in economic interactions is in contrast with the classical approach about the “homo economicus”. This latter assumes that people are selfish and will thus lie whenever it is beneficial for them; they do not consider their effect of lying on the other party; and lying in itself does not carry any cost (Crawford and Sobel, 1982). These assumptions are the basis of a vast number of models, such as Akerlof’s (1970) market for lemons, and of entire fields, such as contract theory or mechanism design. While it is true that cheating and lying can often be observed in the real world, it is far from being ubiquitous. Based on the observation that many people decide to act honestly even when there are no consequences of lying, Ellingsen and Johannesson (2004) were among the first to 3 One obvious question that remains regards the concreteness of the label itself. While we decided to directly associate the label to the budget ‘Children’s Education’, one could also argue that households budget their expenditures along the categories ‘Education’ or ‘Children’. Furthermore, households’ behavior might also crucially depend on the source of income. Induced behavior might differ if the cash transfer is perceived as windfall or if individuals assume that they will receive the money for a longer period of time.
  13. 13. introduce the concept of pure lie aversion. The idea is that the very act of lying makes people suffer a utility cost, and thus refrain from deception even if they otherwise would prefer the option they could reach by lying. In an experiment, Uri Gneezy (2005) offered some people a simple choice between the alternatives of getting 5 Euros for themselves and 15 for the other person, or 15 for themselves and 5 for the other person (a “dictator game”). Not surprisingly, 90% of the participants wanted more money for themselves. However, another group received a slightly different game with the same potential outcomes: they had the option of sending a truthful message to the other person, which the senders knew would result in 5 Euros for them and 15 for the partner, or they could lie which they knew would get them 15 and 5 for the receiver (who had no way to find out whether she had been lied to). In this “deception game” setup, although the payoffs were exactly the same as in the “dictator game”, significantly fewer people (52% of the participants) chose the 15 Euros option for themselves. Gneezy (2005) argues that the fact that “people are less likely to choose the outcome that maximizes their own payoff if it involves a lie than if it involves an innocent choice” proves that people think about lying in a non-consequentialist approach: we distinguish between “two decisions with the same payoff set according to the process leading to the outcomes” (Gneezy, 2005). Research about lie aversion has revealed a number of properties that are crucial to this theory. First, apart from their own gain from lying, people also care about the harm they may cause for the other side. “The average person prefers not to lie, when doing so only increases her payoff a little but reduces the other’s payoff a great deal” (Gneezy, 2005). Second, even if the liar’s payoffs are the same in two scenarios, people think it is more unfair to lie as the harm caused for the other person increases. This result provides an interesting explanation for why people are more accepting of fraudulent behavior directed at large organizations than at individuals: the monetary cost may be identical, but the damage to the individual is perceived as greater. For example, “people are more accepting of lies told by an employee to an employer than vice versa (…), and are more likely to deceive insurance companies than private citizens (…)” (Gneezy, 2005). Third, the theory of belief-dependent lie aversion “implies that a message sender will be more likely to follow a norm of honesty when she believes that the message receiver expects the truth” (López-Pérez & Spiegelman, 2013). 12
  14. 14. Based on these findings, we created a model of lie aversion that incorporates the above-mentioned three properties. Below is the utility that person i receives from lying in a situation where: xi is the change in income person i gets from lying (xi ≥ 0); xj is the change in income person j gets if person i lies (xj ≤ 0); wj is person j’s wealth (as perceived by person i); and trustij is a dummy that equals 1 if person i believes that person j will trust her. 13 푈! =∝! 푥! − 훽! ∗ 푚푎푥 −푥! − 푥!; 0 + 훾! ∗ 푥! 푤! − 훿! ∗ 푡푟푢푠푡!" 푊ℎ푒푟푒 푥! ≥ 0 푎푛푑 푥! ≤ 0 Thus, person i’s problem is: max푈! 푠. 푡.: 푥! = 푓(푥!) In this model, person i’s utility from lying (1) increases if the amount she gains by lying is larger, (2) decreases if by lying she gains less than how much the other person loses; (3) keeping the amount of damage constant, utility decreases if the person whom we harm is poorer; (4) and decreases if person i believes that the other person does not expect a lie. Therefore, person i will decide to lie as long as Ui is positive, tell the truth if Ui is negative, and she will be indifferent between lying and being truthful if it is 0. While in the above model we summarized the findings of previous research on lie aversion, there are some natural extensions that we can add in order to model the decision problem of an individual who is granted money to spend on a given cause. Firstly, the decision here is not necessarily a binary one (lie or not to lie), but one about the extent of lying: how much of the received money should the individual spend on things other than what it was given for? Secondly, lying might also depend on the individual’s own wealth (푤!), or on the size of the amount she wants to lie about relative to the individual’s wealth (!! !! ). Further issues regarding real-world implications have been raised in the literature. Although Gneezy (2005) claims that his results disprove the idea that people are either ethical (never lie) or economic (“always lie to maximize their wealth because they experience no disutility from lying”), Hurkens and Kartik (2009) argue that in fact Gneezy’s results cannot reject this hypothesis. Using a within-subject replication of Gneezy’s (2005) experiment, they find that
  15. 15. “one cannot reject that 50 percent of people lie whenever they prefer the outcome from lying versus truth-telling, and 50 percent of people never lie” (Hurkens & Kartik, 2009). In a later paper, Gneezy, Rockenbach, & Serra-Garcia (2013) find that some people never lie, some always maximize payoffs, and others react to incentives: they lie when the incentives to do so are high enough, but they do not when the incentives are low. Therefore, it is not sure whether those who never lied in the experiment did so because the incentives were not high enough for them, or because they are so ethical that they experience infinite disutility from ever uttering a lie. Despite these minor uncertainties regarding the theory, we believe that lie aversion has the potential to explain why many people comply with the label attached to a cash transfer even though they could spend the money on something else. In order to test the hypothesis that lie aversion is an important underlying reason behind LCTs, for the second treatment, we employ the previously described model. First, the label emphasizes that the government trusts recipients to spend the money as directed, which – according to belief-dependent lie-aversion – should encourage households to follow a norm of honesty. Furthermore, by explicitly stating the person in charge of this program and that his remuneration is dependent upon the program's success, the text seeks to humanize the government and thus makes recipients feel that if they lie, they directly cause substantial harm to another individual (as opposed to a big organization). 14 Label (3): Lying Aversion Starting next month all parents of school age children in your area are eligible to receive a small monthly cash transfer from the Ministry of Education as part of a new social program. This money is being given to you to assist in sending your child to school. You can pick up the transfer from your nearest post office upon presenting a national ID card. Your child’s attendance and enrollment will not be monitored, however we trust you to use this money for their education. Mr. X from the Ministry of Education is responsible for the success of this program and will be paid according to how effective it is at improving enrollment and attendance rates.
  16. 16. 3.4 SOCIAL NORMS Another idea why people might comply with a label is based on social norms: either because they believe that their peers think this is the right thing to do, or because they expect that others will also not cheat. There is extensive literature about how the society can benefit from people’s perception of what others do and accept. In an experiment about tax-compliance, Coleman (1996) compared the effects of four ways to request citizens to pay their taxes. The taxpayers of Minnesota were divided into four groups and given different messages: the first group was educated about the good causes their taxes are used for; the second was warned about the punishments non-compliers might face; the third was told how to get help if one finds tax forms puzzling; and the fourth was informing that most people “report correctly and pay voluntarily 93 percent of the income taxes they owe” (Coleman, 1996). The finding was that, unlike the first three interventions, which had no significant effect, the fourth message was successful in increasing compliance. There are several other examples of social norms making the world a more livable place, such as towel reuse in hotels (Cialdini, 2007), and reduced water consumption during droughts (Train et al., 1987). In order to understand the mechanism behind the effects of social norms, we have to make the crucial distinction between injunctive norms, i.e. “one’s perception of what others believe to be appropriate conduct”, and descriptive norms, which “refer to one’s perception of what most others actually do” (Cialdini, 2007). For instance, one might desire to comply with tax regulations because she knows this is what society would expect her to do (although she knows many people cheat), while she reads Harry Potter books because she believes this is what most of her peers do (although she does not think it is expected). As Bicchieri (2006) emphasizes, there is no “intrinsic property” of a norm that defines whether it is injunctive or descriptive; it is what expectations people have towards that particular behavioral pattern. Even though injunctive and descriptive norms often go hand in hand, a considerable difference between them is the reason behind people’s decision to conform to each. Conformity to injunctive norms usually conflicts our self-interest, yet we do it because we fear punishment or feel pressured by others; on the other hand, we conform to descriptive norms because it is explicitly good for us (Bicchieri, 2006). 15
  17. 17. Bicchieri (2006) gives an elaborate game-theoretic explanation of how injunctive norms transform a mixed-motive game (such as a prisoner’s dilemma) into a coordination game by altering players’ expectations about the other’s expectations and preferences. While a usual prisoner’s dilemma with “self-interested” players (Table 1) will result in a unique Nash equilibrium, the same game played by “norm-follower” players (Table 2) has two strict Nash equilibria. In both tables the Pareto efficient outcome is the underlined {Cooperate-Cooperate}, and the Nash equilibria are highlighted in red. It is visible that while a self-interested interaction will always be sub-Pareto, the norm-follower interaction has the potential to reach Pareto efficiency. The reason for this is that the norm-follower has a different preference ordering over the outcomes from the self-interested player. The self-interested represents the standard disposition to prefer the situation that offers greater benefit for the individual (DC>CC>DD>CD); the norm-follower, on the other hand, likes to reciprocate others’ gestures, but if cooperation were impossible, she would rather be the “crook” than the “sucker” (CC>DD>DC>CD). Therefore, by increasing the possibilities of the other player choosing to cooperate, the norm creates better incentives for the self to cooperate, resulting in higher social welfare – even if they are not fully in line with a narrowly defined self-interest. Conformity to descriptive norms, however, always aligns with self-interest. For instance, wearing fashionable clothes makes me feel good about myself, but I do not fear the community’s punishment if I decide to deviate, and I do not expect a roar of approval if I comply. Bicchieri (2006) contrasts this with injunctive norms, and calls it the unilateral nature of descriptive norms: “though we may have come to expect others to follow a regular behavioral pattern, we do not feel any social pressure to conform”. 16
  18. 18. Bicchieri (2006) represents unilateral expectations in a game theoretic setting by taking the example of how the miniskirt became fashionable in the 1960s (Table 3). Initially it was only a few trendsetters who were wearing miniskirts (M), while the average woman possessed long skirts (L) and jeans (J). This woman would like to be fashionable, therefore, her payoffs are greater whenever she wears the same as the trendsetters; however, since she does not own a miniskirt yet, she would have to invest in one, for which reason her payoff at {M;M}=1 is lower than at {L;L}={J;J}=2. The trendsetters, on the other hand, are hip and extraordinary, whose sole concern is to wear miniskirts – whether or not the average woman follows, they do not care: hence, their payoffs depend exclusively on what they wear. Clearly, imitation is a one-sided coordination problem, which in this case has one Nash equilibrium: {M;M}, highlighted in red. Thaler and Sunstein (2009) argue that there are two main reasons behind conformity. First, people value the information others’ opinion carry: in uncertain situations, when we lack the sufficient amount of information for a steady decision, or when the gathering of information would be too costly, we might decide to follow others because we presume that the majority knows the most effective behavior. When, in a foreign city I do not know which restaurant to have dinner in, I might just choose the most crowded one, since I think many people cannot be wrong. The other reason is real or imaginary peer pressure, which can be the most easily documented in a school setting. Sacerdote (2001) used econometrics to measure peer effects on randomly assigned roommates in Dartmouth College. Both in terms of academic performance and fraternity membership, he found strong correlations between roommates’ achievements. Peer effects can be so important that Thaler and Sunstein (2009) suggest “maybe parents should worry less about which college their kids go to and more about which roommate they get”. Therefore, based on the belief that both injunctive and descriptive norms can be reasons for why people comply with the label, the flyers of the third treatment group intend to induce conformity by exploiting both types of social norms. First, by stating that “the majority of people expressed the belief that money should be spent on what it was given for”, it creates (real or imaginary) peer pressure to conform to the norm; second, by adding “and they indeed spent it on education 17
  19. 19. for their children” the label sends a signal that most people in the community believe education is a worthwhile investment. The label should thus prove effective as social norms theory argues that people value the information gathered from other people's beliefs and actions. 18 Label (4): Social Norms Starting next month all parents of school age children in your area are eligible to receive a small monthly cash transfer from the Ministry of Education as part of a new social program. This money is being given to you to assist in sending your child to school. In past programs, the majority of people expressed the belief that money should be spent on what it was given for, and they indeed spent it on education for their children. You can pick up the transfer from your nearest post office upon presenting a national ID card. 3.5 INFORMATION: MAKING EDUCATION SALIENT Another mechanism through which the provision of LCTs in Morocco might have affected the demand for education relates to the perceived returns to education. Benhassine et al. (2014) show that, using data from household surveys, parents’ beliefs regarding the return to investment were updated positively. Human capital theory, dating back to Gary Becker (1964), predicts that the demand for education is based on the individual's rational decision-making process maximizing private returns. As such, individuals determine the optimal level of education that maximizes their lifetime utility given current investment costs and expected future returns. Current investment costs inhibit not only the direct costs of education, e.g. enrollment fees, but also opportunity costs of time, regarding forgone earnings (Harmon, 2003). Duflo (2001) argues that the returns to education are, in general, larger in developing countries than in industrialized countries. Analyzing a school construction project implemented in Indonesia between 1973 and 1978, she provides estimates for the economic returns to education ranging from 6.8 to 10.6%. However, studies show that students and their parents tend to underestimate economic returns to education. A study in Madagascar shows for example that informing fourth-grade students and their parents about earnings differences among different
  20. 20. education groups increased not only average attendance rates but also test scores (Nguyen, 2008). Jensen (2010) finds in his baseline survey conducted on eighth grade boys in the Dominican Republic that students severely underestimate the returns to education. In fact, students underestimate the returns to education between primary and secondary school graduates by 75%. The provision of information upgraded perceived returns to education and thereby reduced dropout and increased school completion rates. However, Jensen (2010) also argues that stimulating the demand for education might not be enough if barriers, such as credit constraints, still limit the investments that households can make. Therefore, the combination of updating beliefs regarding the returns to education and reducing the direct costs associated with additional education can be seen as a mechanism through which LCTs can increase the demand for education as well as educational outcomes. In the last treatment group, the LCT is, hence, designed to update the parents’ beliefs about the returns to the child’s education. 19 Label (5): Information Starting next month all parents of school age children in your area are eligible to receive a small monthly cash transfer from the Ministry of Education as part of a new social program. This money is being given to you to assist in sending your child to school. You can pick up the transfer from your nearest post office upon presenting a national ID card. A child’s education is one of the most important factors in that child’s success. Children who complete primary school earn higher wages and are less likely to live in poverty in the future then ones that do not complete it. It is estimated that each additional year of education increases a child’s future wage by X%.4 4. IDENTIFICATION STRATEGY After conducting the RCT, we are able to collect the following data for all examined villages: ● Dummy for treatment groups (Control / Mental accounting / Lying aversion / Social norms / Information) ● Baseline measure school enrollment rate 4 Future wage estimates will depend on the chosen country characteristics.
  21. 21. 20 ● Baseline measure school attendance rate ● Post-treatment measure school enrollment rate ● Post-treatment measure school attendance rate ● Take-up of cash transfer in each village ● Characteristics of households and students (as controls) First, we can check if the randomization was done correctly by comparing baseline enrollment and attendance rates across all treatments. Once we made sure the villages were not significantly different before the treatment, we can run the following three regressions, which should all lead to the same conclusion if the randomization was successful. First, we can regress the outcome variables (enrollment and attendance rates) on the treatment dummies without any controls; second, we can regress the outcome variables on the treatment dummies controlling for village-and household characteristics, including pre-treatment outcomes as a control; finally, we can perform a Difference-in-Difference analyses, in which we look at whether the difference between pre- and post-treatment values for each treated group as compared to the control group is significantly different from zero. If the estimator is significantly different from zero for a label then we conclude that it is an effective method to increase compliance. Comparing the magnitudes of the estimates will thereafter also allow us to conclude which label, if any, turns out to be the most effective. As a result, we could consequently advise policy makers to address the specific underlying behavioral mechanism when designing educational policies. One crucial issue that we must consider is partial compliance: since none of the households are forced to take the offered cash transfer, we first and foremost need to check whether the take-up rates systematically differ across treatments by regressing take-up on the treatment dummies. It is only after this that we can estimate the reduced form effect on enrolment and attendance. If the take-up rates are not significantly different, we have no problem concluding that any change in the outcome variables is due to the labels; if, however, there is significant difference between the take-up rates across treatments, we need to address this issue. Since only those get the full treatment (label and cash transfer) who take the money, being in a treatment group is only an instrument for being actually treated; therefore, the experiment will measure ITT (Intention-To-Treat) effects. If we assume that the exclusion restriction holds, we can divide this ITT by the take-up rate to get the real effect of being treated. Since it is likely that
  22. 22. the same cash transfer would impact different households heterogeneously – depending, for example, on family income, and on the child’s gender or age –, we have to drop the constant treatment effect and compliance assumption. Nevertheless, since the treatment is done on the village-level (and not on individual level), we do not need to worry about cross-overs, and thus our estimates are Average Treatment effect on the Treated (ATT).5 Unfortunately, it is conceivable that the exclusion restriction fails, being that it is possible that those who receive a letter but do not take the money still change their behavior. For instance, receiving the information that the government is willing to spend a significant amount of money on improving educational outcomes might induce parents to send their children to school more often even if for some reason they do not take the cash. In this case we cannot identify ATT, but the ITT estimates are still valid. 21 5. CONCERNS & ISSUES Given the very general setup of our RCT, several important issues, as the choice of the country, remain to be solved. Countries differ significantly in many dimensions and an accurate assessment of relevant concerns proves to be difficult without a cultural frame. Nonetheless at this stage, we want to address concerns regarding the provision of cash transfers to improve children’s education. Further, details of the design of the nudge and its possible impact on results are assessed critically. The objective of the tested policy is to increase children’s education. While the importance of this goal is widely recognized, specific educational policies are subjects of many debates; thus, it must be critically examined how effective the chosen policy design is. By using a nudge to change parents’ behavior, we implicitly assume that the education problem is driven by the demand side. Parents choose not to send their children to school, even though there is an adequate supply of schooling. Education is assumed to be a specific form of investment in children and can be increased when families receive a financial nudge. Certainly, it has to be questioned whether a financial nudge can be effective and if it is the most cost effective way to 5 Please note that instead of ATT, some authors use TOT (Treatment effect On the Treated).
  23. 23. reach the goal. There exist numerous other ways to induce higher attendance rates, amongst others providing school uniforms, tampons for girls, health interventions or a free lunch (Kremer & Holla, 2009). Given that the assumption is correct that cash transfers can increase investment in schooling, we need to find the optimal amount of the cash transfer. In order to do this, it is necessary to better understand why parents originally do not choose to send their children to school. Are parents really budget constrained and if so, can they afford school fees or are the opportunity costs of sending their children to school too high? If high opportunity costs are the major reason, the policy would probably only be effective with large scale transfers, such that they act as salaries for the students. Furthermore, Benhassine et al. (2014) presume that their LCT was so effective because mean attendance rates were already very high. Low baseline attendance rates could reflect high opportunity costs or a very constrained budget. As such, a small nudge would probably not be sufficient. Moreover, it is not obvious whether sending more children to school translates into better education for children. If the schools’ quality is low and children do not learn anything, higher enrollment and attendance rates are useless. Due to an increase in class size as a result of the policy, the quality of schooling could even decrease. To assess the effects on education more explicitly, test scores instead of enrollment rates could be measured. Besides a critical review of the general policy, several issues have to be addressed when designing the RCT in greater detail. Amongst others, the distribution of information in written form via mail might pose problems. Benhassine et al. (2014) combined the promotional flyer with the requirement for transfer recipients to enroll their children to the Tayssir program at the school headmaster’s office. The authors argue that the parents’ visit at the school might have updated the parents’ belief with respect to education. While we recognize the importance of the mean by which information is distributed, we argue that the postal way prospers from neutrality and that it might allow us to isolate the true mechanism through which LCTs function. Additionally, information is provided in written form and the issuance of money takes place at the local post office. Certain groups of eligible parents could be excluded from receiving the money because they may face too high opportunity costs to collect the transfer or are illiterate. Since our flyers are all text based, families would need to be able to read the labels for them to 22
  24. 24. have an impact. In the RCT in Morocco literacy rates were quite low, with only 23% of household heads knowing how to read and write (Benhassine et al., 2014). To overcome this issue the RCT should be conducted in an area of high literacy. Further, clarifying pictures could be presented on the pamphlets to reinforce comprehension, and information could be distributed personally. Although we might ensure the take-up of information by using clarifying pictures, the simple take up of information does not guarantee its understanding. Awareness surveys, conducted by Benhassine et al. (2014), revealed that especially during the first year of the pilot project, the rules of the program were not understood well. After one year, in the CCT groups, only about half of parents interviewed knew transfers were conditional. Additionally, in the LCT groups, only about half of parents interviewed knew transfers were unconditional. The weak understanding potentially decreases the importance of conditionality. However, by the second year understanding was improved significantly. Another critical assumption that has to be addressed is the theory of the unitary household. Individual preferences as well as bargaining power might matter significantly for the allocation of household income. As such, the identity of the transfer recipient can be of great importance to the effectiveness of public transfer programs. Several studies have examined that the gender of the recipient within the household changes the usage of cash transfers. Duflo (2003) showed that pensions received by women in South Africa had a large impact on the anthropometric characteristics of girls, while no such impact was found when pensions were received by men. The RCT could therefore be extended such that cash transfers are provided to either the mother or the father. The Tayssir program could not find significant results when testing for differences; however, we have to take the specific cultural context of the study into consideration. There might be great variations of this gender effect between countries and cultures. While men are responsible for handling money in Morocco, women traditionally control finances in the Philippines (Ashraf, 2009). Cultural differences and beliefs will play a critical role in determining the outcome of the program. The effectiveness of the four different labels will probably vary greatly between different countries. The social norms label, for example, might probably be more effective in collectivistic than in individualistic cultures. On top of differences between countries, within 23
  25. 25. country regional and religious diversity must be taken into account. Due to the presumed heterogeneous effects, generalizability of the results must be taken carefully. 24 6. CONCLUSION AND AREAS FOR FURTHER RESEARCH Nudging individuals to choose a socially desirable outcome, while still maintaining their freedom of choice, is a worthwhile goal in economic policy. Following previous literature that suggests that LCTs are an effective method to increase school enrollment and attendance rates for primary school children, we provide a theoretical framework for improving labels and nudging individuals to choose desirable outcomes. Building on selected literature in behavioral economics we focus on four mechanisms to steer individuals’ behavior: mental accounting, lying aversion, social norms, and informational updates. To test our hypothesis that designing labels around these four areas could increase the impact of a LCT, we propose a RCT aimed at increasing enrollment rates and attendance at primary schools. The RCT is comprised of four treatments, each with a label designed following our theoretical framework, and a control group. Further, an estimation strategy for the RCT is outlined and a discussion of concerning issues presented. While our paper looks specifically at implanting theory driven labels in the education sector, this framework for LCTs could be extended into many different areas. LCTs designed using our mechanisms could prove successful in encouraging parents to have their children vaccinated or nudging farmers to purchase fertilizer. Further, more experiments could be conducted to determine the effects of combining the different labels and theoretical frameworks. Perhaps using all four mechanisms in one label is most effective. Additionally, another area for future research could be how to best implement these four mechanisms in LCTs in areas with low literacy rates.
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  29. 29. 28 AUTHORSHIP Angela Bouzanis Victoria Gonsior Rozália Kepes Eva Werli Dear Marta Reynal-Querol, Overall, our Masters’ Project was a collaborative team effort, with us all working closely together on all aspects of the project. We all participated equally in brainstorming & idea creation, research, design of our paper, and editing. A more detailed breakdown of the writing is as follows: Topic – Angela, Victoria, Rozália & Eva Background Research – Angela, Victoria, Rozália & Eva Introduction – Victoria A Recent Field Experiment – Victoria General Design & Control Group – Angela Mental Accounting – Eva Lying Aversion – Rozália Social Norms – Rozália Information: Making Education Salient – Victoria Experiment Design & Labels for all sections – Angela Identification Strategy – Rozália Concerns & Issues – Eva Conclusions and areas for further research – Angela Editing – Angela, Victoria, Rozália & Eva Please let us know if you have any further questions. Sincerely, Angela Bouzanis, Victoria Gonsior, Rozália Kepes, & Eva Werli