September 16, 2003
Libertarian paternalism -- the idea that private and public institutions can and should affect personal behavior while also respecting freedom of choice -- is not an oxymoron, say Cass Sunstein and Richard Thaler of the University of Chicago Law School. In a recent paper, the two argue for concerted efforts by companies and governments to steer individuals' choices in directions that will improve their welfare.
Their research suggests that consumers' preferences are often ill-formed and murky; people typically choose the "default" plan or option because it is easiest and most convenient. Take, for example, the issue of organ donation:
- In many European nations, people are assumed to consent to their organs being donated after death; they must declare on their drivers' licenses if they choose otherwise.
- In the United States, people are assumed to not want organ donation and must specifically say so on their licenses if they do.
- More than 90 percent of citizens in "presumed consent" nations donate their organs.
- Less than 20 percent of Americans exercise the organ donation option.
Thus, the default rule in Europe compared with the U.S. rule affects the number of donors greatly, and changing the default in America would lead to greater overall welfare.
This reasoning applies to many areas, including worker welfare, consumer protection, and the family. One study showed that automatically enrolling employees into the company 401(k) plan -- while giving them the right to "opt-out" at any point -- raised enrollment from 49 percent to 86 percent within a short period of time. Changing the default option in this instance benefits workers while respecting their freedom of choice.
Source: Cass R. Sunstein and Richard H. Thaler, "Libertarian Paternalism Is Not an Oxymoron," Working Paper No. 185, May 2003, University of Chicago Law School.
Browse more articles on Economic Issues