Monday, February 02, 2009

The Berenstain Bears' Libertarian Paternalism

If you are looking to nudge the little ones, consider reading them DOLLAR$ AND $EN$E, from The Berenstain Bears series published by Random House.

Story: The Berenstain children cannot control their spending. While shopping, Brother and Sister Bear routinely beg their parents for money so that they can by frivolous items like a wedding dress for a "Bearbie Doll." Growing frustrated, the parents decide to teach the children how to manage money.

First, the parents try the hands-off approach of giving the cubs a weekly allowance:
"It will be up to you to manage it--to spend it or save it as you see fit."
To their parents' chagrin, the cubs turn out to be a Keynesian dream. Each week they are paid their allowance, the cubs immediately run out to the store and blow through their money quickly, buying candy, bubble gum, cards, and other toys they quickly tire of, then spend the rest of the week moping about.

Of course, the children think the solution is a bigger allowance. However, Mama Bear instead responds by giving her cubs some extra checkbooks from her old bank.
"But instead of giving [the allowances] to [the cubs] at the beginning of each week so that you can go out and spend them before they burn a hole in your pockets, we're going to hold them for you. Then when you want a little pocket money or want to buy something, you write out a check."
The new checkbook system is a success for the parents. Immediately, the cubs start delaying their present consumption for greater future consumption:
"[Sister Bear] decided to save her first week's allowance and buy the Bearbie wedding dress with her next week's allowance so she would still have ten dollars left."
The Economics Lesson: This is a classic example of Libertarian Paternalism, as advocated in Nudge by Cass Sunstein and Richard Thaler. By changing some default in the "choice architecture" of a decision society might achieve welfare improvements. The paternalism lies in letting government (or possibly an employer) decide the default path for the citizen. The libertarian aspect is that the citizen can choose to step off the path and follow a different pursuit. For instance, Sunstein and Thaler often note that when employers automatically enroll their employees into a 401K, they have significantly higher savings rates and greater economies of scale than if they let them voluntarily enroll. Default enrollment in organ donor systems have similar consequences. Since employees and donors can opt-out, it is argued that changing the default is not an act of coercion, but is rather "soft" or "libertarian" paternalism.

On a smaller note, the economic model of the consumer choosing among bundles of goods subject to a budget constraint is displayed throughout. Brother Bear demonstrates his marginal rate of substitution is 10 baseball cards for one baseball book. The story also demonstrates various functions of money, such as store of value and medium of exchange, but there are better childrens books for that lesson.

For the Parents: EconTalk with Thaler in favor of Libertarian Paternalism, and EconTalk with Glaeser against it.

1 comment:

Jason O said...

It must have been your turn to deliver the bedtime story last night.