Thursday, April 3, 2008

Rebate Checks, Direct Deposit: Testing how to fool people

A friend from Grinnell was discussing how she thought the NPR’s Marketplace April Fools’ joke about sending everyone a gift like an air conditioner could have been true. She also thought it would be just like the government to do something like that or send everyone Visa gift cards so people could not repay debt, but had to spend the money.

In turns out my friend is not alone. Not only did Wednesday's post on the April Fools’ joke generate the most hits ever for this blog (so many people must have believed it to). But her visa comment might need some thought too. Dan Ariely, MIT Economist, suggested today that the government should test how households will make decisions to spend based on how the rebate is receive (e.g. by check, direct deposit, or debit card. )

As Dr. Ariely pointed out on Marketplace (link) :

“The field of behavioral economics has rather convincingly shown that money given in different forms can have different effects. For example, paying for dinner in cash feels very different than paying the same bill with a credit card. And an increase in monthly salary has a different effect on a person's spending than the same amount in an equivalent yearly bonus. These results suggest that how you deliver the stimulus package will have a considerable effect on how the money is spent.”

As my friend from Grinnell suggests, if we received Visa cards we would be less likely to pay down debt. Dr. Ariely, suggests the only way we will know which system will work the best is to try to send some people checks and some people direct deposit and some debit card. This type of suggestion is part of a growing trend in economics to test impacts of a policy by running experiments where you give treatment to some and no treatment to a comparable control group just like you would with a new pharmaceutical drug. Compare to the treatment and control group and you have an experiment!

If the government needs any test subjects, they can send my rebate check, deposit it directly, or give me a debit card. Just don’t send pennies.

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