Laboratorio 2011, Brescia

Risky behaviours and health policy:

information, incentives, “fat” taxes and “nudges”

Laboratorio di Organizzazione ed Economia Sanitaria

VII edizione, Maggio 2011

Matteo M Galizzi

The “big 4” and the “3 arms”

Risky health behaviours are major drivers of health deterioration, premature death, and rising health expenditure

Big four killers: smoking, obesity/unhealthy eating, excessive alcohol drinking, sedentary lives

Health policy-makers have typically dealt with them through 3 main “arms”, lines of public interventions, from the less to the more “intrusive”:

• Release of information on health risks

• Financial incentives

• Regulation

Information release

The less intrusive as individuals still have the same set of choices, and are given more information to support their free decisions

The implicit assumption is: the more information you have the better it is

It also assumes that people are indeed fully rational decision-makers who

• process all available information

• plan ahead their future actions

• compute the trade-offs between (present and future) costs and benefits

• optimize: find optimal solution that maximize utility according to preferences

It is the most preferred option by mainstream neo-classical economists who believe government should not interfere with individual decisions, and if it has to intervene, it should do in the less invasive way: “Hey, teacher, leave the kids

alone...”

Information release II

In the context of risky health behaviours, government should just expose consumers to information about the health risks of smoking, eating too much calories/unbalanced diets, drinking too much alcohol, and not doing physical exercise

and then leave the people alone to make up their free decisions

Many health policies in OECD countries have started from this position:

• Smoking kills: health information on cigarettes’ packages

• Low fat/5 a day: food labelling, calories and nutrition information

• 2(3) alcohol units a day: any alcohol drink show # of units; pregnant women

• Walk to work: campaigns to induce mild physical exercise

And beyond the idea of running informational campaigns, leaflets, posters...

Information is (socially) beneficial even if produces no changes in health behaviour, as enable people to choose what they prefer (Teisl, 2001)

Does information work?

Recently an increasing number of scientific works have questioned whether information is really effective in reducing risky health behaviours

From an economist’s perspective, the toughest criticisms comes from the development of experimental economics:

Hundreds of experimental economists have tested in the lab and in the field the Hundreds of experimental economists have tested in the lab and in the field the idea that people are rational decision-makers, plan ahead trade-off:

1. we are human beings, and as such, we do make lots of mistakes and errors!

2. we are often unable to make the best choice for us, or don’t know it either!

3. we are often let down by too much information and choice

4. we are risk averse, suffer from myopia, impatience, and overconfidence

This has informed a new approach to economics:

behavioural economics: really “cool” in health economics too

Idea is that economic decisions may be “satisfying” rather than “optimizing”

Does more information work for health?

Generally, no strong scientific evidence that information works

Macro figures: the DoH in UK has invested billions from 1980 to now in informational campaigns to reduce obesity, smoking and alcohol drinking

Not significant effects!

Experimental evidence from health scientists and psychologists on information for clinical tests and medical treatments, in general shows that

information is effective in changing health-related behaviour such as compliance and adherence with doctors’ recommendations when:

• Targets are patients that are already at risk of a specific health condition

• Requires specific changes in behaviour that are under full control of the subjects

• Behaviours are one-off or, if repeated, in a limited time period

This is consistent with experimental evidence on information and health behaviours

Does more information work for health behaviours?

Smoking kills:

no evidence that information on packages has helped to decrease rates of active smoking

People are much more aware of risks, but struggle to change habits

Quitting smoking is difficult process: lack of self-control involved

Bans to smoke in public are much more effective in reducing smoking

Current research on disentangling effects of prices, information and bans in public spaces

Does more information work for eating behaviours?

Information on healthy eating: in general “mixed” evidence too

5-a-day campaign: informational campaign run in UK between 2002 and 2004 to educate British people to eat at least 5 portions of fruits/vegetables a day (Halpern, 2004).

Evidence that informational campaign was associated with a +27% increase of the purchases of fruit/veg with respect to what would have occurred if prices had not purchases of fruit/veg with respect to what would have occurred if prices had not changed

(Mazzocchi, Trail & Shogren, 2009: actually prices did increase in the 2002-2004 for being most fruit/veg imported from outside UK)

But, even after 5-a-day info campaign, the lower income families still consume half fruit/veg than the richer families and react much less (+20% vs +36%)

More generally, a systematic review of all the scientific assessments of its effects found that the 5-a-day info campaign

• Raises awareness of the need to consume more fruit/veg

• But was not associated with significant changes in behaviour

Does more information work for labelling food?

Food labelling:

Two types of labelling: GDA and traffic lights

• GDA: guidelines for daily amounts: full nutritional facts

• Signposts: simplified labels with green, amber, red on selected categories

UE Commission and nutrition experts are in favour of GDA, as signposts tend to over-simplify the nutrition info

On the other hand, recall what Michelle Obama said about GDA in march 2010 to the conference of the American Association of Grocery Manufacturers:

“The last thing i had time to do was to stand in a grocery store aisle squinting at

ingredients that i couldn’t pronounce to figure out whether something was

healthy or not”. (Source: George Loewenstein’s slides “The price is wrong”)

In UK the two schemes are voluntary and supermarkets chains choose the one they prefer: TESCO and Waitrose use GDA, M&S and Sainsbury’s the signposts

Evidence on food labelling: US

Very little rigorous evidence. Too early perhaps

Also, existing scientific evidence is mixed, at best, and comes from US or UK

US: NLEA labelling of GDA type, cost in the range of 166 billions $

Effects of GDA labels in the US (Variyam & Cawley, 2007): Effects of GDA labels in the US (Variyam & Cawley, 2007):

Used Diff-in-Diff study and found

• No impact on obesity rates, except the ones of white women who used the labels

• Possible benefit only for consumers already motivated and that use labelling info

Similar results for calories labelling in New York City: GDA labelling

• led to increase in consumption of iron and fibres

• No impact on total fat, saturated fat or cholesterol

• No impact on obesity

Evidence on food labelling: UK

Evidence that labelling works only for more motivated and interested consumers

And mostly in terms of avoiding really “bad” foods (red light), than choosing genuinely healthy food (green light) (Fox et al., 2002)

This is consistent with more general experimental finding that “negative” messages tend to always work better than “positive”

Systematic review by Grunert and Wills (2007) found that

• both GDA and signposts do not lead to consumers avoiding unhealthy foods, but only to moderate their consumption!

• Both labels triggered substitution effects: consumers switch to healthier options within the same categories

• But they can also have some effects on the producers: manufacturers may change the composition of some foods to obtain more attractive nutritional labels

Experimental evidence on food labelling I

Very little experimental evidence available

Wisdom, Downs and Loewenstein (in progress) considered n=1200 subjects recruited for survey study, in exchange for free snacks

Randomly assigned to one of 10 labelling conditions

1. Control group with no information1. Control group with no information

2. Calorie info only

3. Calorie info + daily intake reference

4. Calorie info + daily snack intake reference

5. Percentage of daily calories

6. Percentage of daily snack calories

7. Minutes on a treadmill

8. Heuristic cue 1: nutrition grade

9. Heuristic cue 2: expected body size

10.Heuristic cue 3: traffic lights/signposts rating

(Source: George Loewenstein’s slides “The price is wrong”)

Experimental evidence on food labelling II

In general experimental results support the idea that labelling lead to some decrease in the calories of the chosen snacks

Not all types of labelling are equally effective though

In particular, effects of numerical values tend to be rarely significant and lower than heuristic cues!

For instance, significant decrease (-10% or more) in calories of chosen snacks occur only when numeric information was in terms of minutes on treadmill and percentage of daily snacks calories.

However, the effects was much more significant (-20/25%) when labelling used heuristic cues such as traffic lights and expected body size.

Moreover, they found no effect in normal weight sample, but significant effect in overweight sample

Interaction between different labelling

In general little and mixed evidence on effects of calories labelling

Evidence becomes even more blurred when you consider interaction between calories labelling and other types of labels!

Labels for health claims: Good for your health

Roe et al. (1999) found in an experiment thatRoe et al. (1999) found in an experiment that

• Health claims reduce searching for nutritional information

• They lead consumers to trade-off health claims and nutritional facts in the calories labels

• Induce positive perception from other attributes to also have wider health effects: high in omega 3 also implicitly assumed to be lower fat!

Miller et al (1998), found that

• Low fat labels also induce to eat larger quantities so that the overall energy intakes increase!

• Also, very little evidence on overall change in nutritional intakes (Kral et al. 2001)

Food labelling and meals out

Evidence on food labels mostly concern meals in: food purchased in supermarkets

For a variety of reasons (e.g. longer working times, less time to spend cooking) more and more meals are consumed out, especially in UK, US

No country in the world has ever implemented a policy to increase nutritional information and food labelling on meals out

Consumers will be able to choose healthier optionConsumers will be able to choose healthier option

Effects on providers’ side as well: labels would stimulate restaurants to offer more healthier options: non-price competition (differentiation) among restaurants

Labelling of all foods would also be costly, though.

Especially small, independent restaurants may not have the capacity to run nutritional tests and labels, or to standardise recipes, portions, quantities

This gives advantages and indirectly favours further diffusion of restaurant chains

Evidence is scarce on labels on meals out

• Stibeltky et al (2000) have run a pilot field experiment and show that a “low fat” information label on a meal in a restaurant led to lower choices of that meal.

• Relates to evidence that we tend to believe that high fat foods taste better

Advertising

Also, policies to reduce (rather than increase) information: regulation of advertising

Fact: there is very high share of advertising for unhealthy foods (drinks, snacks)

Most of advertising spending by the food industry in US is in big 5 categories:

Sugared cereals ($448 bn); soft drinks ($200 bn); confectionery (); savoury snacks and fast food ($1450 bn). (Zywicky at al, 2004)

All categories that turn the HEI nutritional pyramid by the USDA upside down!

For mainstream economists, advertising is always beneficial as consumers are sovereign and can make better choices with more info.

However, since Galbraith, doubts on it: advertising may be persuasive/manipulative

Evidence: banning advertising decreases consumption of unhealthy foods (Skinner et al., 2005)

Systematic review by UK FSA suggests that changes in regulation on advertising on foods leads to changes in attitudes and requests of children to their parents

But finds weak and inconsistent link with changes in consumption patterns

Source: Mazzocchi et al. (2009): FatEconomics

TV and advertising

One of the most debated issue

Evidence of significant relation between the time spent on watching TV and obesity

Many have argued that it is a causal relationship through 2 channels:

1. People eat more while watching TV (e.g. Than while walking)

2. People are more exposed on advertising on foods and thus eat more2. People are more exposed on advertising on foods and thus eat more

• On 1, the most serious objection is that both can be caused by a third factor, such as the lack of physical exercise (endogeneity)

• On 2, the first channel is already an objection: people can eat more watching TV even in absence of advertising on foods. Plus, consumers more and more often skip commercials.

Also, internet is getting more and more important as an advertising channel

In general there are too many confounding factors to establish a clear causality link

Only two bans of food advertising: Quebec (1980) and Sweden (1990)

Scientific evidence is weak: no study found a link between advertising and obesity

On smoking/alcohol more evidence: +6/7% consumption after advertising bans

Financial incentives

A more direct and “intrusive” form of intervention

Economists believe we respond to incentives, and mostly study role of incentives

By providing financial incentives, people may change their health behaviours

For instance, making unhealthy activities more expensive: taxes on fats, cigarettes

Or making healthy activities cheaper: subsidies for going to the gym, vegetablesOr making healthy activities cheaper: subsidies for going to the gym, vegetables

The scope of introducing incentives in health is much wider though

Incentives in health can be implemented in different forms according to:

• Target subject: general subjects (consumers, workers, kids, mothers); patients; doctors (or nurses)

• Target behaviour: health behaviours; undertaking medical treatments or tests, medical compliance/adherence; outputs, prescriptions, performance

• Characteristics of the behaviour: risky habits (smoking, drinking, over-eating, sedentary lives) vs socially desirable activities (blood/organs donation); repeated vs one-off; removing unhealthy behaviour vs promoting healthy

• Characteristics of the incentive: cash, vouchers, prizes, deposits, lotteries....

Reviews of financial incentives

A complete review of the type, role and effects of financial incentives is beyond the scope of this presentation. There is a lot of work in this area at the moment

Wellcome Trust has funded and established the Centre for the Study of Incentives in Health (CSIH) in UK, an inter-disciplinary inter-university research centre involving economists (LSE), medical doctors and psychologists (Kings’ College involving economists (LSE), medical doctors and psychologists (Kings’ College London) and philosophers and experts in bioethics (Queen Mary London).

Analogous initiative is Center for Incentives in Health (CIH) a research centre by University of Pennsylvania in US.

Lots of (more or less systematic) reviews and meta-analyses are forthcoming on specific aspects of financial incentives: pooling together evidence from scientific studies in psychology, medicine and economics on the effects on incentives in health

Financial incentives on risky health behaviours

Focus on “big 4”. In this area, incentives:

Target general subjects or some sub-categories: consumers, workers, mothers, kids...

Target risky health behaviours

Usually targeted behaviours is habitual: eating, smoking, sedentary lives

The intended targeted behaviour may consist in removing an “unhealthy” behaviour (e.g. quit smoking, cut alcohol drinks, do not eat fats/sugars) or in promoting an “healthy” behaviour (e.g. eating fruits/veg, making regular physical exercise)

Generally the intended objective is a sustained change of behaviours over time

Usually conditional on observed behaviours, incentives can take different forms: proper incentives vs disincentives (subsidies vs taxes are special case); cash vs kind payments (goods, vouchers, health-related goods); prizes, lotteries...

Issue I: (cost-)effectiveness and sustainability

Central question is whether financial incentives really work: effectiveness

Effectiveness of incentives is tested by experiments, similar to RCTs

Subjects are randomly allocated to either a control or some treatment groups.

“Treated” subjects are given financial incentives conditional to health behaviours

Behaviour in the field is observed and compared across control and treatment groupsBehaviour in the field is observed and compared across control and treatment groups

Incentive are effective when there are statistically significant differences in observed outcomes across control/treatment groups

Other economic-related questions concern

Relative effectiveness of incentives: which specific type implies larger differences

Cost-effectiveness of incentives: comparing costs and outcomes of different types

Even for effective incentives, a crucial issue is sustainability of change in behaviour:

Subjects can respond to incentives with one-off changes in behaviours, but fail to sustain the changed behaviours in the long run

In general, very little evidence on long-term effects of incentives: high cost/difficulty

Issue II: acceptability of incentives – perverse effects

The most crucial, non-economic issue, is related whether incentives are acceptable

From a social perspective, incentives for changing unhealthy habits amounts to pay someone who is indulging in “bad” behaviour, mostly with public funds

Is this fair/acceptable for the ones who have “healthy” behaviours?

Moreover, the recipients of the incentives already cause “negative externalities”

Subjects with unhealthy behaviours cost more to the national health services

Why pay them even more than others?

Counter-objection that this is exactly to reduce externalities due to unhealthy behaviours only works if incentives indeed work

But even more importantly, can this trigger a perverse effect?

• May be an implicit incentive to, first, indulge in unhealthy behaviours, and

• Then, accept money for changing them into healthy ones!

If so, incentives are also unlikely to be effective: gaming

Issue III: crowding out (in) of intrinsic motivation

An interesting question is whether incentives may “crowd out” intrinsic motivation

Hypothesis by Tittmus: if you pay to donate blood, you attach a price to it

You may attract some more people, but the donors that were already giving blood may react by stopping doing it as a reaction to not be seen as doing it for money

Donating blood is no longer a pro-social activity, and becomes a market exchange

Experimental evidence supports the idea for pro-social behaviour: charities, donation

At the same way, if you pay someone to quit smoking or lose weight, he/she may react by not doing, as do not want to be seen as doing for money only

This may especially the case of more intrinsically motivated subjects

Experimental evidence is limited and does not support crowding out for health behaviour

• In cases it may even turn into a “crowding in” effect: habit formation

• paying already intrinsically motivated subjects, make incentives more likely to work

This suggests that is crucial to understand what individual preferences look like!

Issue IV: paying enough or not pay at all

The difficulty related to many unhealthy behaviours is that they are mostly pleasant

• Eating, drinking, smoking are mostly associated with hedonic pleasure

• Removing them is painful and thus costly: diet, quitting cigarettes!

Incentives need to be high enough to compensate for the pain and subjective costsIncentives need to be high enough to compensate for the pain and subjective costs

Incentives need to work as “reward” to counterbalance the decrease in “pleasure”

Also related to crowding-out: too low financial incentives can trigger perverse effect

“The pleasure of smoking a cigarette for me is much higher than a couple of € more!”

but may even trigger higher indulgence (“Well, I now know how much I like smoking”)

And even lead subjects to increase the minimum amount they’ll accept as incentive

In general, important to assess individual preferences and pleasure-reward trade-offs

Experimental evidence: subjects react to incentives only when are high enough (Gneezy and Rustichini, 2000; 2001).

Do incentives work for health behaviours?Reviewing literature on medicine, economics and psychology

Only reliable studies are RCTs: target subjects are

• randomly allocated to either a control C (no incentive) or a treatment T (incentives)

Incentive works if difference across average in C and T is statistically significant

Most reliable studies follow subjects for a long period both before and after incentives

• Difference-in-Difference design: compare differences ∆ over time across C and T

• Effective: ∆ (T-C) in average desired change in behaviour is positive

• Not effective: no ∆ (T-C) in average desired change in behaviour

• Crowding out: ∆ (T-C) in average desired change in behaviour is negative

• Sustainable: ∆ (T-C) in average desired change in behaviour remains positive

Crowding out often interpreted as incentives that is not sustainable over time

Difficult to test compensating behaviour as subjects cannot be observed always...

Review incentives for: smoking cessation, physical exercise, eating behaviours

Incentives for smoking cessationHiggins et al (2004): RCT with pregnant women

• Vouchers contingent (T) or not (C) to smoking cessation: mean $397

• Subjects observed during pregnancy and 12 weeks after vouchers were removed

• Contingent vouchers more effective in inducing quitting

• Effects sustained up to 24 weeks post-partum (12 weeks after end of vouchers)

Volpp et al (2006; 2009): RCT with 179 smokers

Five sessions program (patches) during 8 weeks

Incentives vs control group: $20 each session + $100 if quitting

• Short-run (75 days after): significantly higher quitting rates in T

• Long-run (6 months after): quit rates not significantly different in T and C

Incentive effective only in short-run, but not evident crowding-out

However, no information available on number of cigarettes smoked or nicotine inhaled

In principle, non-quitters may have reacted by smoking more! (“rebound” effect)

Source: Volpp et al. (2006, 2009)

Incentives for exercisingCharness and Gneezy (2009): RCT with students: randomized in 3 groups

• Control (C): handouts about benefits of exercise

• Low incentive (L): $25 to attend gym once in a week

• High incentive (H): $100 to attend gym 8 times in a month

Subjects observed before and 7 weeks after incentive is removed

Post-intervention attendance in H significantly higher than in C and L

No crowding out at all: at the contrary, positive habit formation!

Main conclusion of habit formation confirmed by a second study

Students randomized in 3 groups: all given handouts and paid $75

• Control (C): no requirement

• Low incentive (L): required to attend gym once in a week

• High incentive (H): required to attend gym 8 times in a month

Still significantly higher attendance in H than C and L

Mostly driven by subjects who before were not regular gym attendees

Source: Charnessand and Gneezy(2009)

Source: Charness and Gneezy (2009)

Incentives for healthy dietCooke at al (2011) RCT for healthy diets with 472 children

Children liking of 6 vegetables measure before intervention

Compare both liking (i.e. Intrinsic motivation) and intakes (behavioural change)

Four conditions:

• control (C),

• exposure (E),

• exposure + tangible reward (ETR),

• exposure + social reward (ESR)

Liking and intakes assessed immediately after repeated exposure sessions (10-12), 1 month, 3 months after

Both liking and intakes increased in E, and even more in ESR and ETR

Both liking and intakes sustained after 1 and 3 months: no crowding out

Source: Cooke et al. (2011)

Source: Cooke et al. (2011)

Incentives for weight lossJeffery at al. (1978, 1983): RCT to lose weight

• Incentivized groups had immediate weight loss, significantly higher than control

• However, substantial amounts of weight regained 3 months after end of incentive

Incentives not sustainable in long term: Maintaining weight loss is key problem

Finkelstein et al (2007): RCT with obese people, assessed after 3 and 6 months

Steady payment (S); Front load (F); Back load (B)

• After 3 months: F subjects significantly higher weight loss

• After 6 months: no statistically significant differences in weight loss

Why don’t incentives work for eating habits? A case study: unhealthy eating, overeating leading to obesity, the biggest of 4

Before describing the evidence on incentives, let’s go back to economic causes

Economics of obesity

• In US 28.6% of population is overweight (OW) and 32.2% is obese (OB)

• In UK 32.1% OW, 23% OB

• In Mexico OW are 36.6%, OB 30.2%, in Greece OW are 29.9%, OB 21.9%

• Lowest figures only in Korea, Japan, Scandinavia, Italy

US citizens have increased their BMI from 1970 to 2000: +8.9% (24.6 to 26.3)

But obese people (95th percentile tail of distribution) have put on weight much more quickly than average: +16.8% (33.9 to 39.6)

• Distribution across age: mean age of US obese is 45-55 years

• Distribution across income: in UK lower income class is 25% more likely to become obese than top income class

Only decrease in BMI over time in UK is for top-class women

Source: Mazzocchi et al. (2009): FatEconomics

Source: Mazzocchi et al. (2009): FatEconomics

Why do people “choose” to be overweight?

Let’s buy the position of mainstream economists: people choose to be overweight

E.g. People choose to buy cheap, unhealthy foods, to buy more of other goods

Even if people seem to act perfectly rationally in their own interest, ethic issues raise:

• Even rational subjects may lack of control: impatience, myopic, hyperbolic• Even rational subjects may lack of control: impatience, myopic, hyperbolic

• People may be rational, but under-educated: difficult to understand labels

• Healthy foods (e.g. fish, vegetables, fruit) may be too expensive

• In poor classes pressure to be thin is lower than in middle-high classes

• Some ethnic groups may have inherited a “thrifty gene”, making them efficient in storing calories during food shortage, but also fatter in food abundance

• Burning calories out may be too expensive: e.g. Gym

• Supermarkets and local shops: if you are very poor and do not have a car, need to rely on local shops that usually do not sell fresh healthy foods

Economic causes of rise in obesity

No evidence that increases in income caused increase in food intakes/obesity

Lakdawalla et al (2002): technological innovation has led to higher productivity: work is less physically demanding, but we are working more and getting busier

Engaging in physical activity is more expensive, as opportunity cost of time is higher

Also spending time in cooking is more costly

Mass preparation of food: people consume more ready-prepared meals

Meals out, frozen, microwave foods, labour at home replaced by supermarkets

Time spent in cooking has halved in US from the 1960s

Cutler & Glaeser (2003): fried potatoes took hours, people ate boiled: + 54% chips

Also massive constant availability of food: just open cupboards, eat more frequently

Cutler (2003): consumption of snacks exploded in 1977-1996

Snacks are dry, very caloric and energy-dense: very little water

Fruits and vegetables contain more water and nutrients and help feeling satiated

What happened to the price of food?

In general, prices of foods has decreased in real terms in 1975-2005:

i.e. Prices of other goods have increased more

In US, prices of carbonated drinks, sugars and fats have decreased in real terms in 1975-2005, and

have also decreased by a larger extent than prices of other foods (e.g. Vegetables)

• Relative prices of unhealthy foods have dropped

• Relative (and absolute) prices of healthy foods have risen

• Real price of fruits and vegetables rose by +17% in 1997-2003

• Real price of 2-liter bottle of Coke fell by -35% in 1990-2007

All this have made cheaper and cheaper unhealthy HCFN foods

In the UK trend has not been so clear-cut

Source: Mazzocchi et al. (2009), Fat Economics

What about the price for calorie?

Drewnowski (2008, 2009) argues that what really matters is the price for calories

Measuring price for calorie in US supermarkets for LCFN and HCFN foods

• Carrots cost more than 5 times per calorie than chips

• Orange juice more than 5 times Coke

Price per calorie of vegetable/fruit has increased much more (+40%) than snacks and other energy dense foods (-23%)

Evidence that HCFN foods are less (and becoming less and less) expensive than LCFN in terms of price per calorie is universal:

Israel: Gandal et al (2009): vegetables cost more than 3 times than candies

In US someone also blame the agricultural public policy

US government subsidies soy and corn, used to process HCFN

Source: Gandall et al (2009)

Do consumers really care about prices?

In general, economic evidence is mixed on this point

Lack of clear-cut experimental evidence on this point

Generally speaking, in developed countries price elasticity of food is close to 0!

Evidence from labs and supermarkets indicates that

consumers are price sensitive on differences between healthy and unhealthy foods!

Relative prices are more important

• Also, price sensitivity correlated with income, but correlation is small

• Sensitivity to relative prices cuts across all income classes

• Consumers that are very price sensitive consume more HCFN and less LCFN (Gandall et al. 2009)

George Loewenstein: food prices are simply wrong!

Market prices may indeed be wrong: food prices are misaligned

Misaligned prices because of

• Externalities

• Internalities

Externalities: costs that people impose on others but do not take into account.

Prices people pay do not reflect “true” costs to society

In food: prices of raw ingredients, and especially highly processed raw ingredients are a small fraction of cost of final product

Food industry does not directly bear the huge costs to society of health consequences of unhealthy foods: the price is wrong

Typical public economics instruments to deal with externalities are taxes

Carbon tax, CO2 tax, fat tax

This calls for more direct policy intervention, on the top of financial incentives

Fat taxes and thin subsidies

Fat taxes or thin subsidies?

Little economic literature has simulated the effects of fat taxes

In Arkansas a tax of 2 cents on each can generates a revenue of $40 mln a year

All taxes on soft drinks and confectionery in US generates $1 bn a year

Marshall (2000): calculate that an increase in VAT up to 17.5% on rich fat reduces ischemic risks of 1.8-2.6% with more a 1000 lives saved a year.

Leicester and Windmeijer (2004): simulate introduction of fat tax in UK based on calories. Find that 2% of poorest consumers would pay 7 times as much the proportion of their income as the 2% richest consumers.

Cash et al. (2005): calculate that a 1% subsidy on prices of fruits and vegetables in US can prevent 9700 cases of heart diseases per year.

Chuinard et al (2005): calculate that a tax proportional to fat content reduces fat intake of 1%, and that burden on poor consumers is10 times higher

Smed et al (2007): find that a revenue-neutral combination of tax on fats and subsidy on fibres decreases sugar intakes and increased fibres in Denmark

Mytton et al. (2007): Find small health benefits, and only in foods consumed at home. More energy-dense meals out. Perverse effects: salt intakes increase!

On the progressivity/regressivity of fat taxes

In general, strong evidence that lower income consumers are more obese and eat more unhealthy foods

Low income consumers are also more responsive/sensitive to price changes: higher price elasticity

Therefore they are likely to bear the highest share of the burden of a fat tax

On the other hand, poor income consumers will respond more to financial incentives

They would adjust their consumption patterns more than the rich consumers and gain more in health outcomes from a fat tax

• Thus, while the health benefits of the fat tax is clearly regressive

• The tax benefits of the fat tax may be progressive

Also, depends on what the raised money is going to be spent (ear-marked tax)

Are fat taxes better than thin subsidies?

Epstein et al (2010) run an experiment to compare thin subsidies and fat taxes

Recreate a supermarket environment in the lab to simulate purchasing decisions

Randomize sample of mothers to different treatments: control C, subsidies S, taxes T

Manipulate prices of foods: subsidies on LCFN food, taxes on HCFN foods

• In S mothers indeed purchase more LCFN than in C• In S mothers indeed purchase more LCFN than in C

• In T mothers purchase less HCFN than in C

• However, in S mothers also purchase more HCFN than in C so that

Overall energy intakes in S is higher than in C, which is higher than in T

Hence fat taxes may induce higher energy/calories intakes than thin subsidies

The reason is that lower prices for LCFN foods induce mothers to buy them

But also translate into savings that are used to purchase other foods, also HCFN

Fat taxes and thin subsidies?

Pros and cons of both taxes and subsidies used on their own

• On the one hand, fat taxes have clear regressive effects

• On the other hand, thin subsidies may be effective in inducing higher consumption of “healthy” foods such as fruits/vegetables

But they may fail in that they leave more money available in consumers’ hands

Thin subsidies allow consumers to save on healthy foods

They may then spend more on other “unhealthy items”

So both have disadvantages on their own

But why do not introduce both of them simultaneously?

Although never tested and missing evidence, in principle

the simultaneous introduction of fat taxes and thins subsidies may work

• Make healthy foods cheaper...

• But also unhealthy more expensive!

Quoting Loewenstein: aligning the prices

Larger scope for coordinated and direct policy intervention in food markets:

Alignment of prices (from George Loewenstein, The Price is Wrong)

• Tax production and sale of unhealthy foods

• Subsidize production and sale of healthy foods (e.g. vegetables / fruit)

• Mandate (more than) proportionate pricing of junk foods to stop supersizing• Mandate (more than) proportionate pricing of junk foods to stop supersizing

• Lower the cost of exercise

• Invest in bike paths

• Incentivize people and children to walk

• Discourage use of cars

• Subsidize gym membership

• Subsidize even public transportation

Re-aligning prices:

Food industry will devote its creativity to sell healthy foods

Internalities and health behaviour

Prices maybe misaligned prices because of internalities as well

Internalities: costs that people impose on themselves but do not (sufficiently) take into account in their decisions

Prices people pay do not reflect “true” costs to themselves!

Loewenstein’s research

Why would people fail to internalize costs to themselves?

• Lack of knowledge/information

• Mis-perception of risks

• Lack of control

• Present-biased preferences

Behavioural factors and internalities are deeply rooted attitudes

Really unlikely that they can be simply removed by taxes/subsidies

Back to understanding behavioural determinants of health risky behaviours

Little is known, and lot still to understand

Internalities: lessons from behavioural economics

Once we understand the deeply rooted determinants of health behaviours....

We can use them to help people to be aware and solve internalities

“Nudging” individual choices and decisions: Thaler in US; BIT in UK

Use people’s biases to help them: George Loewenstein (The price is wrong):Use people’s biases to help them: George Loewenstein (The price is wrong):

• Play on default/status quo bias by making healthy options the default

• Play on present-biased preferences by giving people immediate rewards for

healthy behaviours

• Regret lotteries

• Deposit contracts: StickK.com

• Designing more effective financial incentives using insights from experimental and

behavioural economics

Incentives: lessons from behavioural economics

Volpp, Loewenstein et al (2008). RCT on financial incentives to lose weight

57 obese men randomly assigned to 3 groups and followed 16 weeks + follow-up

• Control (C): weight-monitoring program with monthly weigh-ins

• Deposit contract (D): subjects can contribute between $0.01-3.00 each day of month

1:1 matched from intervention, plus $3 a day: could gain up to $252 a month

oney refundable if they met or exceed target weight loss

• Lottery (L): eligible for a daily lottery only if they reported weight below or at goal

Frequent small payoffs ($10) and infrequent large payoffs ($100)

All subjects had to weigh every morning before eating/drinking and call to report

Txt messages to tell them how much money they earned that day

Or, if unsuccessful, how much they would have earned if they had reached target

Every end of month, all subjects had to weigh on clinical scale to see if they were below target, and, if so, then actually paid money earned the month

Successful subjects followed for 6 months after end of incentives

“Behavioural” incentives work!

• Significantly higher weight losses for D and L than C groups

• Also, higher success rates after 16 weeks

Longer term effects: after 7 months from end of incentives

• No significant differences in weight loss between C, D and L• No significant differences in weight loss between C, D and L

• But no crowding out either

• Subjects in D and L weight significantly less than at the beginning

Source: Volpp et al. (2008) JAMA

Why do “behavioural” incentives work?

Incentives based on behavioural economics and experimental evidence work in promoting weight loss, at least in short term

• Txt messages and feedback immediately after daily weigh in and reporting:

Evidence: even small rewards and punishment have great incentive value

• Frequent small payoffs and infrequent large payoffs:

Evidence: people is less risk averse and more attracted by large stakes

• Txt message feedback on what they could have gained if successful:

Evidence: desire to avoid (anticipated) regret drives decisions under risk

Deposit contract in which cumulated money can be lost if unsuccessful:

• Evidence: loss aversion, people react more strongly to losses than equal gains

Large potential scope for experimental and behavioural economics (and psychology)

To provide evidence to design effective health policies

Thank you a lot!