Social, Behavioral and Experimental Economics Seminar: Botond Köszegi

Understanding Markets with Socially Responsible Consumers (joint with Marc Kaufmann)

Abstract
We analyze how socially responsible consumers — those who care about climate change or another global externality — behave in a classical price-based market, derive properties of the resulting competitive equilibria, and study the effectiveness of different kinds of policies. Price taking is violated in that a vanishingly small consumer cares about her impact on the behavior of the rest of the market to a non-vanishing extent. That impact is endogenous to the situation and typically dampens her efforts to mitigate the externality. Even if all consumers put the same weight on the externality as the social planner, any equilibrium features overconsumption, and multiple equilibria can arise. To motivate socially responsible consumers to lower the externality, a unit tax is superior to a cap-and-trade-system in a closed economy, but there are policies that are even better than a tax. Furthermore, under trade with a large or very polluting partner, a cap is better than a tax. When there are two products that are perfect substitutes in consumption but generate different externalities, there is always an equilibrium in which the products have the same price and consumers are indifferent between them. Under conditions we identify, this selfish equilibrium is the unique equilibrium. In a selfish equilibrium, a cap and a unit tax on the dirty good can achieve the same outcomes. In non-selfish equilibria, a proportional subsidy on the cleaner product dominates both a unit tax and a cap.

Speaker bio

Botond Köszegi is research director at the Behavior and Inequality Institute in Bonn, Germany. He was previously university professor at Central European University, Budapest, Hungary, and professor at the University of California at Berkeley. He has held a visiting position at the Massachusetts Institute of Technology. He received a BA in mathematics from Harvard University in 1996 and a PhD in economics from MIT in 2000. He was one of the first students to write a PhD thesis entirely on behavioral economics. He has since published extensively on behavioral economics topics, including several lead articles, in top journals such as the American Economic Review, Quarterly Journal of Economics, Review of Economic Studies, Econometrica, and Journal of the European Economic Association. His research interests are primarily in the theoretical foundations of behavioral economics. He has produced research on self-control problems and the consumption and regulation of harmful products, self-image and anticipatory utility, reference-dependent preferences and loss aversion, markets for deceptive products, and misguided learning. He has received European Research Council Grants in 2012 and 2018, and the Jansson Award, a biennial award for the best economist in Europe under the age of 45, in 2015. He was managing editor at the Review of Economic Studies.