According to a standard economic model, a fourteen-year-old girl in Kenya will go to school if doing so will enable her to earn more than she spent on her education. A family will buy dilute-chlorine solution, measure out capfuls to treat their water, and wait for the chlorine to disinfect their water if the health benefits exceed the cost of the chlorine. Since a school uniform that lasts a year or two costs only six dollars, and a month’s supply of chlorine runs about $0.30, these costs should be fairly minor factors. Influenced in part by these arguments, many governments in the developing world and nongovernmental organizations (NGOs) concerned with development have maintained small charges for education and preventative health care.
However, in recent decades economists have increasingly come to recognize what most of us have long known: human beings don’t always make the best decisions.
A new type of economics, dubbed “behavioral economics,” seeks to understand deviations from the simple “rational agent” model that has dominated economics for most of its history—why people procrastinate, say, or why Americans don’t exercise or save enough.
In the developed world, these ideas are beginning to affect policy. For instance, the Pension Protection Act of 2006 encourages U.S. employers to establish automatic enrollment for retirement plans. Could such approaches help alleviate poverty in developing countries? If policies based on behavioral economics can help Americans save more, could they also help Indian children get vaccinated or Kenyan children get cleaner water?
Evidence from randomized evaluations in the developing world suggests they might.