IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v170y2020icp301-312.html
   My bibliography  Save this article

Opportunity cost neglect in public policy

Author

Listed:
  • Persson, Emil
  • Tinghög, Gustav

Abstract

Opportunity cost is the foregone benefit of options not chosen. If opportunity costs are neglected in decisions about public policy, there is a high risk that the best options are overlooked. We study opportunity cost neglect in public policy in experiments with members of the general public in Sweden and international experts on priority setting in health care (n = 957). We find strong evidence of opportunity cost neglect in public policy, where participants who acted in the role of policy makers were between six and ten percentage points less likely to invest in a public health program when reminded about opportunity costs (money could fund other health programs). To our surprise, we failed to confirm an effect consistent with opportunity cost neglect in private consumption; but exploratory analyses revealed a substantial age effect that reconciles our findings with previous literature. Young participants showed opportunity cost neglect, while the effect was reversed for old participants. The implications of opportunity cost neglect for public policy are substantial, including misallocation of public resources and an artificially high demand for public spending.

Suggested Citation

  • Persson, Emil & Tinghög, Gustav, 2020. "Opportunity cost neglect in public policy," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 301-312.
    • Handle: RePEc:eee:jeborg:v:170:y:2020:i:c:p:301-312
    DOI: 10.1016/j.jebo.2019.12.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268119303956
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2019.12.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ernesto Dal Bó & Pedro Dal Bó & Erik Eyster, 2018. "The Demand for Bad Policy when Voters Underappreciate Equilibrium Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 964-998.
    2. Shane Frederick & Nathan Novemsky & Jing Wang & Ravi Dhar & Stephen Nowlis, 2009. "Opportunity Cost Neglect," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 36(4), pages 553-561, December.
    3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    4. Karl Claxton & Simon Walker & Steven Palmer & Mark Sculpher, 2010. "Appropriate Perspectives for Health Care Decisions," Working Papers 054cherp, Centre for Health Economics, University of York.
    5. van Exel, Job & Baker, Rachel & Mason, Helen & Donaldson, Cam & Brouwer, Werner, 2015. "Public views on principles for health care priority setting: Findings of a European cross-country study using Q methodology," Social Science & Medicine, Elsevier, vol. 126(C), pages 128-137.
    6. Northcraft, Gregory B. & Neale, Margaret A., 1986. "Opportunity costs and the framing of resource allocation decisions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 37(3), pages 348-356, June.
    7. Sheffer, Lior & Loewen, Peter John & Soroka, Stuart & Walgrave, Stefaan & Sheafer, Tamir, 2018. "Nonrepresentative Representatives: An Experimental Study of the Decision Making of Elected Politicians," American Political Science Review, Cambridge University Press, vol. 112(2), pages 302-321, May.
    8. Stephen A. Spiller, 2011. "Opportunity Cost Consideration," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 38(4), pages 595-610.
    9. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January.
    10. Ana Bobinac & N. Job A. van Exel & Frans F. H. Rutten & Werner B. F. Brouwer, 2013. "Valuing Qaly Gains By Applying A Societal Perspective," Health Economics, John Wiley & Sons, Ltd., vol. 22(10), pages 1272-1281, October.
    11. Heath, Chip & Soll, Jack B, 1996. "Mental Budgeting and Consumer Decisions," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 23(1), pages 40-52, June.
    12. Johanna Wiss & Lars-Ake Levin & David Andersson & Gustav Tinghög, 2017. "Prioritizing Rare Diseases: Psychological Effects Influencing Medical Decision Making," Medical Decision Making, , vol. 37(5), pages 567-576, July.
    13. Sunstein, Cass R, 2000. "Cognition and Cost-Benefit Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 1059-1103, June.
    14. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    15. Daniel Read & Christopher Y. Olivola & David J. Hardisty, 2017. "The Value of Nothing: Asymmetric Attention to Opportunity Costs Drives Intertemporal Decision Making," Management Science, INFORMS, vol. 63(12), pages 4277-4297, December.
    16. Eddama, Oya & Coast, Joanna, 2008. "A systematic review of the use of economic evaluation in local decision-making," Health Policy, Elsevier, vol. 86(2-3), pages 129-141, May.
    17. Jonathan Siverskog & Martin Henriksson, 2019. "Estimating the marginal cost of a life year in Sweden’s public healthcare sector," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(5), pages 751-762, July.
    18. Eddama, Oya & Coast, Joanna, 2009. "Use of economic evaluation in local health care decision-making in England: A qualitative investigation," Health Policy, Elsevier, vol. 89(3), pages 261-270, March.
    19. Magnus Johannesson & David Meltzer, 1998. "Editorial: Some reflections on cost‐effectiveness analysis," Health Economics, John Wiley & Sons, Ltd., vol. 7(1), pages 1-7, February.
    20. Nora Moumjid & Lionel Perrier & Maria-Laura Silva & Hans-Martin Späth, 2012. "The use of economic evaluations in health decision-making at the macro level: a literature review," Post-Print halshs-00752572, HAL.
    21. Marcus R. Munafò & Brian A. Nosek & Dorothy V. M. Bishop & Katherine S. Button & Christopher D. Chambers & Nathalie Percie du Sert & Uri Simonsohn & Eric-Jan Wagenmakers & Jennifer J. Ware & John P. A, 2017. "A manifesto for reproducible science," Nature Human Behaviour, Nature, vol. 1(1), pages 1-9, January.
    22. Emil Persson & David Andersson & Lovisa Back & Thomas Davidson & Emma Johannisson & Gustav Tinghög, 2018. "Discrepancy between Health Care Rationing at the Bedside and Policy Level," Medical Decision Making, , vol. 38(7), pages 881-887, October.
    23. Sheffer, Lior & Loewen, Peter John & Soroka, Stuart & Walgrave, Stefaan & Sheafer, Tamir, 2018. "Nonrepresentative Representatives: An Experimental Study of the Decision Making of Elected Politicians - CORRIGENDUM," American Political Science Review, Cambridge University Press, vol. 112(2), pages 428-428, May.
    24. Antonides, Gerrit & Manon de Groot, I. & Fred van Raaij, W., 2011. "Mental budgeting and the management of household finance," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 546-555, August.
    25. Werner Brouwer & Pieter Baal & Job Exel & Matthijs Versteegh, 2019. "When is it too expensive? Cost-effectiveness thresholds and health care decision-making," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(2), pages 175-180, March.
    26. Nosek, Brian A. & Ebersole, Charles R. & DeHaven, Alexander Carl & Mellor, David Thomas, 2018. "The Preregistration Revolution," OSF Preprints 2dxu5, Center for Open Science.
    27. Dwight R. Lee & J. R. Clark, 2018. "Can behavioral economists improve economic rationality?," Public Choice, Springer, vol. 174(1), pages 23-40, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, C. Yiwei & Sussman, Abigail B. & Wang-Ly, Nathan & Lyu, Jennifer K., 2022. "How consumers budget," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 69-88.
    2. Andreas Hefti & Peiyao Shen & King King Li, 2021. "Igniting deliberation in high stake decisions: a field study," ECON - Working Papers 378, Department of Economics - University of Zurich.
    3. repec:cup:judgdm:v:17:y:2022:i:6:p:1379-1391 is not listed on IDEAS
    4. Serena Iacobucci & Roberta De Cicco, 2022. "A literature review of bullshit receptivity: Perspectives for an informed policy making against misinformation," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 6(S1), pages 23-40, July.
    5. repec:jdm:journl:v:17:y:2022:i:6:p:1379-1391 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ashworth, Laurence & Darke, Peter R. & McShane, Lindsay & Vu, Tiffany, 2019. "The rules of exchange: The role of an exchange surplus in producing the endowment effect," Organizational Behavior and Human Decision Processes, Elsevier, vol. 152(C), pages 11-24.
    2. Miotto, Ana Paula S. C. & Parente, Juracy, 2015. "Antecedentes e consequências do gerenciamento das finanças domésticas na classe média baixa brasileira," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 55(1), January.
    3. Spiller, Stephen A. & Ariely, Dan, 2020. "How does the perceived value of a medium of exchange depend on its set of possible uses?," Organizational Behavior and Human Decision Processes, Elsevier, vol. 161(C), pages 188-200.
    4. Niklas Dreyer & Robert M. Gillenkirch, 2019. "Cash versus opportunity costs and revenues in bilateral bargaining," Journal of Business Economics, Springer, vol. 89(4), pages 357-383, June.
    5. Zhang, C. Yiwei & Sussman, Abigail B. & Wang-Ly, Nathan & Lyu, Jennifer K., 2022. "How consumers budget," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 69-88.
    6. Huang, Jiaqi & Antonides, Gerrit & Nie, Fengying, 2020. "Is mental accounting of farm produce associated with more consumption of own-produced food?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 88(C).
    7. Christophe Bellégo & Romain De Nijs, 2020. "The Unintended Consequences of Antipiracy Laws on Markets with Asymmetric Piracy: The Case of the French Movie Industry," Information Systems Research, INFORMS, vol. 31(4), pages 1064-1086, December.
    8. Hueber, Laura & Schwaiger, Rene, 2022. "Debiasing through experience sampling: The case of myopic loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 87-138.
    9. Rebecca Hamilton & Debora Thompson & Sterling Bone & Lan Nguyen Chaplin & Vladas Griskevicius & Kelly Goldsmith & Ronald Hill & Deborah Roedder John & Chiraag Mittal & Thomas O’Guinn & Paul Piff & Car, 2019. "The effects of scarcity on consumer decision journeys," Journal of the Academy of Marketing Science, Springer, vol. 47(3), pages 532-550, May.
    10. Botond Kőszegi & Filip Matějka, 2020. "Choice Simplification: A Theory of Mental Budgeting and Naive Diversification [“Fungibility, Labels, and Consumption,”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 1153-1207.
    11. Chatterjee, Subimal & Rai, Dipankar & Heath, Timothy B., 2016. "Tradeoff between time and money: The asymmetric consideration of opportunity costs," Journal of Business Research, Elsevier, vol. 69(7), pages 2560-2566.
    12. Liu, Hsin-Hsien, 2013. "How promotional frames affect upgrade intentions," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 237-248.
    13. Cheng, Andong & Baskin, Ernest, 2021. "Disproportionate redemption discounting: Mental accounting of discounted credit," Journal of Business Research, Elsevier, vol. 128(C), pages 156-163.
    14. Nicole Koschate-Fischer & Katharina Wüllner, 2017. "New developments in behavioral pricing research," Journal of Business Economics, Springer, vol. 87(6), pages 809-875, August.
    15. Sarofim, Samer & Chatterjee, Promothesh & Rose, Randall, 2020. "When store credit cards hurt retailers: The differential effect of paying credit card dues on consumers' purchasing behavior," Journal of Business Research, Elsevier, vol. 107(C), pages 290-301.
    16. Chu, Hsunchi & Liao, Shuling, 2010. "Buying while expecting to sell: The economic psychology of online resale," Journal of Business Research, Elsevier, vol. 63(9-10), pages 1073-1078, September.
    17. Andersson, Henrik & Ouvrard, Benjamin, 2024. "Not on my plate! Using mental accounting to promote meat substitutes," TSE Working Papers 24-1547, Toulouse School of Economics (TSE).
    18. Hochman, Guy & Ayal, Shahar & Ariely, Dan, 2014. "Keeping your gains close but your money closer: The prepayment effect in riskless choices," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 582-594.
    19. Berman, Jonathan Z. & Bhattacharjee, Amit & Small, Deborah A. & Zauberman, Gal, 2020. "Passing the buck to the wealthier: Reference-dependent standards of generosity," Organizational Behavior and Human Decision Processes, Elsevier, vol. 157(C), pages 46-56.
    20. S. Olofsson & U.-G. Gerdtham & L. Hultkrantz & U. Persson, 2019. "Value of a QALY and VSI estimated with the chained approach," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(7), pages 1063-1077, September.

    More about this item

    Keywords

    Opportunity cost neglect; Policymaking; Experts; Decision-making; Bias; Replication;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D1 - Microeconomics - - Household Behavior
    • H4 - Public Economics - - Publicly Provided Goods
    • H5 - Public Economics - - National Government Expenditures and Related Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:170:y:2020:i:c:p:301-312. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.