When Do "Nudges" Increase Welfare?

Hunt Allcott, Daniel Cohen, William Morrison and Dmitry Taubinsky

American Economic Review, 2025, vol. 115, issue 5, 1555-96

Abstract: We use public finance sufficient statistic approaches to characterize the welfare effects of "nudges," such as simplified information and warning labels, in markets with taxes and endogenous prices. While many studies focus on average effects, we show that welfare also depends on how the nudge affects the variance of choice distortions, and average effects become irrelevant with zero pass-through or optimal taxes. We implement the framework with experiments evaluating automotive fuel economy labels and sugary drink health labels. Labels decrease purchases of low-fuel economy cars and sugary drinks but may decrease welfare because they increase the variance of choice distortions.

JEL-codes: D18 D62 D83 D91 H21 L62 L66 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aer.20231304

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