Paying for performance: the power of incentives over habits

Abstract

New evidence suggests that individuals do not always make rational decisions, especially with regard to health habits. Smoking, misuse of alcohol, overeating and illicit drug use are leading causes of morbidity and mortality. Thus, influencing health habits is critical for improving overall health and well-being. This editorial argues that economists should take a more active role in shaping individuals’ health habits. Two recent innovations in economic theory pave the way. One change is that some economists now view rationality as bounded and willpower in short supply. Another, related to the first, is a more accepting perspective on paternalism, authorizing economists to help individuals make better choices when the neoclassical model breaks down. Findings from psychology offer incentive-based approaches; specifically, contingency management (CM). Economists could use this approach as a basis for developing public and private policies.

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