Many economic and social challenges, such as climate change, pandemics, and energy crises, require behavioral change. One approach is to use behavioral insights to influence people directly, and another is to change incentives through institutional design. In behavioral market design (Bolton & Ockenfels, Reference Bolton and Ockenfels2012; Ockenfels & Rees-Jones, Reference Ockenfels and Rees-Jones2023), the two approaches feed off each other.
Auction design is one example. For instance, auctions such as eBay exhibit a lot of sniping (last-minute bidding), which hampers the market efficiency. Sniping is not easily explained by simple textbook economics, because eBay's proxy bidding system ensures that the highest bid wins at the “lowest possible price,” regardless of the timing of the bid. Although there may be many reasons why bidders bid in the last minute, the data suggest that the interaction of “naïve” incremental bidding and the strategic response of sophisticated bidders to naïve bidding contributes to the phenomenon. Market design to eliminate sniping and to protect naïve bidders relies on such behavioral insights (Roth & Ockenfels, Reference Roth and Ockenfels2002; Ariely, Ockenfels, & Roth, Reference Ariely, Ockenfels and Roth2005; Chen, Cramton, List, & Ockenfels, Reference Chen, Cramton, List and Ockenfels2021 as well as Ockenfels & Roth, Reference Ockenfels, Roth, Vulkan, Roth and Neeman2013 provide surveys).
Economic design frequently addresses cognitive limitations and considerations that go beyond financial gain and economic efficiency, such as privacy, fairness, and regret aversion. Exciting work at the intersection of economic design, computer science, and behavioral science – sometimes involving human subject experiments to test market innovations (Chen et al., Reference Chen, Cramton, List and Ockenfels2021; Ockenfels, Reference Ockenfels2009; Roth, Reference Roth2008, Reference Roth, Vulkan, Roth and Neeman2013) – attests to the complementarities between economic design and behavioral science (e.g., Bergemann, Breuer, Cramton, Hirsch & Ockenfels, Reference Bergemann, Breuer, Cramton and Ockenfels2023; Bichler, Ewert, & Ockenfels, Reference Bichler, Ewert and Ockenfels2023; Kearns & Roth, Reference Kearns and Roth2019; Meta Fundamental AI Research Diplomacy Team (FAIR) et al., Reference Bakhtin, Brown, Dinan, Farina, Flaherty and Zijlstra2022).
Market rules that harness human behavior can improve market outcomes. For instance, the sharing economy relies on people's willingness to provide honest feedback about their transactions to other market participants through “feedback systems.” Feedback systems can suffer from free riding (no feedback) and low information value (feedback that is too compressed or biased). Behavioral science shows that promoting altruistic punishment and preventing counter-punishment is central to cooperation (Fehr & Gächter, Reference Fehr and Gächter2000; Nikiforakis, Reference Nikiforakis2008; Ostrom, Walker, & Gardner, Reference Ostrom, Walker and Gardner1992). Bolton, Greiner, and Ockenfels (Reference Bolton, Greiner and Ockenfels2013) show how this can be achieved in feedback systems by changing the rules by which feedback information flows through the market, leading to more accurate reputation information, more trust, and more efficient trading. In response to such insights, eBay supplemented its old two-sided feedback system with a one-sided system (called “detailed seller ratings”), Airbnb created a blind feedback system where transaction partners cannot see each other's feedback until they have left their own, and Uber makes it difficult for passengers to identify a particular feedback giver (e.g., Bolton, Greiner, & Ockenfels, Reference Bolton, Greiner and Ockenfels2018, Reference Bolton, Mans and Ockenfels2020, Reference Bolton, Breuer, Greiner and Ockenfels2023; Fradkin, Grewal, & Holtz, Reference Fradkin, Grewal and Holtz2019).
Nonsimultaneous chains in kidney exchange are another example where economic design relies on people's willingness to cooperate. Selfishness would suggest that people renege on their commitment once their intended donor gets a kidney, but this is a rare event, and market design relies on this to make kidney exchange work at scale (Ashlagi, Gilchrist, Roth, & Rees, Reference Ashlagi, Gilchrist, Roth and Rees2011; Kute et al., Reference Kute, Patel, Modi, Rizvi, Shah, Engineer and Gandhi2021).
Cooperation is also key for successful climate policy. Chater & Loewenstein explain the limits of nudging individual climate action (also Berger et al., Reference Berger, Kilchenmann, Lenz, Ockenfels, Schlöder and Wyss2022). Individual climate action – as opposed to collective action – is often offset by crowding out and leakage effects, which in turn can interact with the design of climate markets. For example, because the cap in cap-and-trade markets determines total carbon dioxide (CO2) emissions, nudging people to reduce their electricity consumption does not reduce emissions; it only reduces the CO2 price. Choice architects sometimes fail to recognize this market-level leakage effect. Institutional architects, on the other hand, sometimes fail to take advantage of voluntary individual climate action when designing incentives (Ockenfels, Werner, & Edenhofer, Reference Ockenfels, Werner and Edenhofer2020). Research at the interface of design and behavior may more effectively help promoting cooperation, for example by illustrating that reciprocity can be built into the design of climate negotiations (Cramton, MacKay, Ockenfels, & Stoft, Reference Cramton, MacKay, Ockenfels and Stoft2017; Schmidt & Ockenfels, Reference Schmidt and Ockenfels2021).
One important way in which institutions are shaped is by people's attitudes about the appropriateness of market transactions. For example, selling kidneys for transplantation or trading university admissions is illegal in most countries (Roth, Reference Roth2007) and voters often oppose carbon pricing (Dechezleprêtre et al., Reference Dechezleprêtre, Fabre, Kruse, Planterose, Chico and Stantcheva2022). Also, in crises such as a pandemic or extreme energy shortages market mechanisms are sometimes seen as unfair or repugnant. For example, vaccine markets fail in part because the role of price in allocating vaccines is severely limited.
Finding institutions that avoid or mitigate these kinds of objections may determine the extent to which societies succeed or fail in dealing with the challenges of our time. A stream of recent research at the design–behavior interface is thus concerned with understanding the empirical nature of such behavioral constraints (Ambuehl, Reference Ambuehl2017; Ambuehl, Bernheim, & Ockenfels, Reference Ambuehl, Bernheim and Ockenfels2021; Berger, Ockenfels, & Zachmann, Reference Berger, Ockenfels and Zachmann2023; Kölle, Kübler, & Ockenfels, Reference Kölle, Kübler and Ockenfels2023; Leider & Roth, Reference Leider and Roth2010; Schneider et al., Reference Schneider, Campos-Mercade, Meier, Pope, Wengström and Meier2023). Another literature develops mechanisms that are consistent with the constraints imposed by attitudes about appropriateness. These include many well-known examples of markets without prices – matching markets – and “behaviorally robust” and ethically acceptable markets for crisis management (Cramton, Ockenfels, Roth, & Wilson, Reference Cramton, Ockenfels, Roth and Wilson2020; Kremer, Levin, & Snyder, Reference Kremer, Levin and Snyder2020; Ockenfels, Reference Ockenfels2021, Reference Ockenfels2022; Prendergast, Reference Prendergast2017; Roth, Reference Roth2002, Reference Roth2007).
Many economic and social challenges require changes in behavior. Behavioral change, in turn, requires knowledge about how people and institutions respond to each other. There have been some exaggerated claims about the role of choice architecture as a solution to major economic challenges, and about the role of experimental economics in market design. However, an increasing number of case studies and a rapidly growing demand for research at the intersection of economic design and behavioral science show that a careful merging of these research fields can pay great dividends.
Many economic and social challenges, such as climate change, pandemics, and energy crises, require behavioral change. One approach is to use behavioral insights to influence people directly, and another is to change incentives through institutional design. In behavioral market design (Bolton & Ockenfels, Reference Bolton and Ockenfels2012; Ockenfels & Rees-Jones, Reference Ockenfels and Rees-Jones2023), the two approaches feed off each other.
Auction design is one example. For instance, auctions such as eBay exhibit a lot of sniping (last-minute bidding), which hampers the market efficiency. Sniping is not easily explained by simple textbook economics, because eBay's proxy bidding system ensures that the highest bid wins at the “lowest possible price,” regardless of the timing of the bid. Although there may be many reasons why bidders bid in the last minute, the data suggest that the interaction of “naïve” incremental bidding and the strategic response of sophisticated bidders to naïve bidding contributes to the phenomenon. Market design to eliminate sniping and to protect naïve bidders relies on such behavioral insights (Roth & Ockenfels, Reference Roth and Ockenfels2002; Ariely, Ockenfels, & Roth, Reference Ariely, Ockenfels and Roth2005; Chen, Cramton, List, & Ockenfels, Reference Chen, Cramton, List and Ockenfels2021 as well as Ockenfels & Roth, Reference Ockenfels, Roth, Vulkan, Roth and Neeman2013 provide surveys).
Economic design frequently addresses cognitive limitations and considerations that go beyond financial gain and economic efficiency, such as privacy, fairness, and regret aversion. Exciting work at the intersection of economic design, computer science, and behavioral science – sometimes involving human subject experiments to test market innovations (Chen et al., Reference Chen, Cramton, List and Ockenfels2021; Ockenfels, Reference Ockenfels2009; Roth, Reference Roth2008, Reference Roth, Vulkan, Roth and Neeman2013) – attests to the complementarities between economic design and behavioral science (e.g., Bergemann, Breuer, Cramton, Hirsch & Ockenfels, Reference Bergemann, Breuer, Cramton and Ockenfels2023; Bichler, Ewert, & Ockenfels, Reference Bichler, Ewert and Ockenfels2023; Kearns & Roth, Reference Kearns and Roth2019; Meta Fundamental AI Research Diplomacy Team (FAIR) et al., Reference Bakhtin, Brown, Dinan, Farina, Flaherty and Zijlstra2022).
Market rules that harness human behavior can improve market outcomes. For instance, the sharing economy relies on people's willingness to provide honest feedback about their transactions to other market participants through “feedback systems.” Feedback systems can suffer from free riding (no feedback) and low information value (feedback that is too compressed or biased). Behavioral science shows that promoting altruistic punishment and preventing counter-punishment is central to cooperation (Fehr & Gächter, Reference Fehr and Gächter2000; Nikiforakis, Reference Nikiforakis2008; Ostrom, Walker, & Gardner, Reference Ostrom, Walker and Gardner1992). Bolton, Greiner, and Ockenfels (Reference Bolton, Greiner and Ockenfels2013) show how this can be achieved in feedback systems by changing the rules by which feedback information flows through the market, leading to more accurate reputation information, more trust, and more efficient trading. In response to such insights, eBay supplemented its old two-sided feedback system with a one-sided system (called “detailed seller ratings”), Airbnb created a blind feedback system where transaction partners cannot see each other's feedback until they have left their own, and Uber makes it difficult for passengers to identify a particular feedback giver (e.g., Bolton, Greiner, & Ockenfels, Reference Bolton, Greiner and Ockenfels2018, Reference Bolton, Mans and Ockenfels2020, Reference Bolton, Breuer, Greiner and Ockenfels2023; Fradkin, Grewal, & Holtz, Reference Fradkin, Grewal and Holtz2019).
Nonsimultaneous chains in kidney exchange are another example where economic design relies on people's willingness to cooperate. Selfishness would suggest that people renege on their commitment once their intended donor gets a kidney, but this is a rare event, and market design relies on this to make kidney exchange work at scale (Ashlagi, Gilchrist, Roth, & Rees, Reference Ashlagi, Gilchrist, Roth and Rees2011; Kute et al., Reference Kute, Patel, Modi, Rizvi, Shah, Engineer and Gandhi2021).
Cooperation is also key for successful climate policy. Chater & Loewenstein explain the limits of nudging individual climate action (also Berger et al., Reference Berger, Kilchenmann, Lenz, Ockenfels, Schlöder and Wyss2022). Individual climate action – as opposed to collective action – is often offset by crowding out and leakage effects, which in turn can interact with the design of climate markets. For example, because the cap in cap-and-trade markets determines total carbon dioxide (CO2) emissions, nudging people to reduce their electricity consumption does not reduce emissions; it only reduces the CO2 price. Choice architects sometimes fail to recognize this market-level leakage effect. Institutional architects, on the other hand, sometimes fail to take advantage of voluntary individual climate action when designing incentives (Ockenfels, Werner, & Edenhofer, Reference Ockenfels, Werner and Edenhofer2020). Research at the interface of design and behavior may more effectively help promoting cooperation, for example by illustrating that reciprocity can be built into the design of climate negotiations (Cramton, MacKay, Ockenfels, & Stoft, Reference Cramton, MacKay, Ockenfels and Stoft2017; Schmidt & Ockenfels, Reference Schmidt and Ockenfels2021).
One important way in which institutions are shaped is by people's attitudes about the appropriateness of market transactions. For example, selling kidneys for transplantation or trading university admissions is illegal in most countries (Roth, Reference Roth2007) and voters often oppose carbon pricing (Dechezleprêtre et al., Reference Dechezleprêtre, Fabre, Kruse, Planterose, Chico and Stantcheva2022). Also, in crises such as a pandemic or extreme energy shortages market mechanisms are sometimes seen as unfair or repugnant. For example, vaccine markets fail in part because the role of price in allocating vaccines is severely limited.
Finding institutions that avoid or mitigate these kinds of objections may determine the extent to which societies succeed or fail in dealing with the challenges of our time. A stream of recent research at the design–behavior interface is thus concerned with understanding the empirical nature of such behavioral constraints (Ambuehl, Reference Ambuehl2017; Ambuehl, Bernheim, & Ockenfels, Reference Ambuehl, Bernheim and Ockenfels2021; Berger, Ockenfels, & Zachmann, Reference Berger, Ockenfels and Zachmann2023; Kölle, Kübler, & Ockenfels, Reference Kölle, Kübler and Ockenfels2023; Leider & Roth, Reference Leider and Roth2010; Schneider et al., Reference Schneider, Campos-Mercade, Meier, Pope, Wengström and Meier2023). Another literature develops mechanisms that are consistent with the constraints imposed by attitudes about appropriateness. These include many well-known examples of markets without prices – matching markets – and “behaviorally robust” and ethically acceptable markets for crisis management (Cramton, Ockenfels, Roth, & Wilson, Reference Cramton, Ockenfels, Roth and Wilson2020; Kremer, Levin, & Snyder, Reference Kremer, Levin and Snyder2020; Ockenfels, Reference Ockenfels2021, Reference Ockenfels2022; Prendergast, Reference Prendergast2017; Roth, Reference Roth2002, Reference Roth2007).
Many economic and social challenges require changes in behavior. Behavioral change, in turn, requires knowledge about how people and institutions respond to each other. There have been some exaggerated claims about the role of choice architecture as a solution to major economic challenges, and about the role of experimental economics in market design. However, an increasing number of case studies and a rapidly growing demand for research at the intersection of economic design and behavioral science show that a careful merging of these research fields can pay great dividends.
Acknowledgments
I thank Al Roth and Sebastian Berger for very useful comments.
Financial support
Support by the German Science Foundation through Germany's Excellence Strategy (EXC 2126/1 390838866) and through the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No 741409) is gratefully acknowledged.
Competing interest
None.