Recent developments in behavioural economics have deeply influenced the way governments design public policies. They give citizens access to online simulators to cope with tax and benefits systems and increasingly rely on nudges to guide individual decisions. The recent surge of interest in Behavioural Public Finance is grounded on the conviction that a better understanding of individual behaviours could improve predictions of tax revenue and help design better-suited incentives to save for retirement, search for a new job, go to school or seek medical attention. Through a presentation of the most recent developments in Behavioural Public Finance, this Element discusses the way Behavioural Economics has improved our understanding of fiscal policies. 

DOI : https://doi.org/10.1017/9781009029087

Prediction of tax revenue must account for earnings responses with respect to all perceived incentives, whether they are effective or not. This paper explores the extent to which tax filers respond to irrelevant incentives and develops an identification procedure for the behavioral cross-influence (BCI), a behavioral elasticity created by Farhi and Gabaix (2020) to capture such responses. Relying on French income tax returns from 2008 to 2014, the BCI is identified from earnings responses to a shadow tax bracket located just below the threshold where French income tax liabilities start. Even tax filers who used to correctly optimize their taxable income react to an increase in irrelevant tax incentives. Far from being zero, the BCI represents between 56% and 78% of the elasticity of taxable income with respect to perceived incentives. Standard analysis restricted to effective incentives would underestimate this elasticity of taxable income by 60%. Tax filers who face higher stakes are less likely to be misled by irrelevant incentives.

Claimants do not always take-up the Unemployment Insurance (UI) benefit extension they are eligible for. The French National Employment Agency grants benefit extensions to recipients who reach benefit exhaustion and have worked for a certain period of time since the start of their spell. To this end, claimants are required to send an Employer Certificate for each contract they undertook. Until mid-2014, above one fifth of unemployed workers did not fully certify their work history. In this paper, we show that a simple informational intervention may strongly increase the take-up of potential UI benefit extensions, especially among recipients with little unemployment experience. The ̏renewal-of-entitlement" reform of October 2014 introduced an informative letter automatically sent to claimants upon benefit exhaustion and emphasizing the role of Employer Certificates. Relying on the administrative file of French UI claimants (FNA) in a regression discontinuity design, we estimate that the letter reduced by 14 points the share of claimants who do not certify their full work history and extended the potential benefit duration by one month on average. This informational mailing narrowed the gap in certification behavior between claimants with different levels of unemployment experience. 

In this paper, we take advantage of the implicit cognitive exercise available in standard Labor Force Surveys in order to propose a new indicator of financing constraints that is based on the cognitive load they generate (Mullainathan and Shafir, 2013). Survey respondants are requested to report their monthly wages, which we compare to their administrative, fiscal counterparts. We propose a well defined index of worker-level uncertainty which filters out their potential rounding behavior and reporting biases. We estimate it with (unsupervised) ML/EM techniques and obtain that workers tend to perceive their own wages with a degree of uncertainty of around 10%. Through the lens of a simple rational signal extraction model, this amounts to estimates of workers' attention ranging between 30% and 84% depending on their wage level, education, tenure and gender. Most importantly, we show that the attention of the lowest paid 30% of workers is cyclical and increases steadily (by 17 percentage points) in the ten days preceding payday, before dropping instantaneously at that date, which through the lens of a simple model is indicative of end-of-month financing (liquidity) constraints. This pattern furthermore reveals that the cognitive cost induced by these financing constraints arises from not too concave (or convex) costs of achieving high levels of attention, and convex costs of maintaining it over time.