Behavioural Compatibility between Individual Choice and Collective Action

There are many instances in economic and social life where good individual choices add up to poor choices for society. The financial crisis of 2009 can be understood in these terms: an individual banker may expect it to be profitable to grant a loan to a risky customer, but bankers collectively granting risky loans leads to systemic market collapse and a loss for all. A similar story lies behind the accumulation of atmospheric carbon dioxide where it makes sense for each firm or individual to burn fossil fuels but it does not make sense at global level. There are traditional economic models of these situations but recent research, including work at the Institute of Quantitative and Technical Economics (IQTE) and at the Tax Administration Research Centre (TARC), has shown the importance of psychological and cultural factors in guiding decisions. The emergence of behavioural economics, and the changed perspective on individual choice that has resulted, gives a pressing need to re-examine the links between individual choices and social outcomes within the new paradigm.

The application for funding will support workshops, masterclasses, visitor exchange, and a joint research programme of a partnership between the IQTE, China, and TARC, UK. The activities of the partnership are designed to merge the expertise of the two organisations. TARC has considerable expertise in applying computer simulations of individual behaviour to model social outcomes. It also has specialized capability in experimental economics with ready access to a large body of experimental subjects and capability in using online experiments to target specific sectors of the population. TARC is also developing competence in computable general equilibrium. IQTE is one of most important departments in the Chinese Academy of Social Sciences. It acts as a "think tank" to support state decisions on fiscal (tax) and financial policy-making. It is highly skilled in the mathematical modelling of economic problems and also has extensive capabilities in computer simulation and experimentation. In both research institutes the focus of research has been exploring real policy problems to enhance economic development and social welfare.

The research programme will develop the experience of IQTE and TARC in applying a range of research methods to policy problems. The underlying theme of an improved understanding of the social, or "macro", outcome by better modelling of individual, or "micro", decisions will underpin the individual research projects. The selected research projects have policy relevance in both China and the UK and include implementing VAT in the financial sector, poverty reduction and the reduction of inequality, and investor behaviour and emergence of capital markets. The results of the research will be communicated to policy-makers in China and in the UK so that policy impact is achieved, and to academics worldwide so the international impact is obtained.

The immediate impact of the partnership's activities will be an improved understanding of how individual choices with behavioural preferences aggregate into social outcomes. This understanding will be applied to a range of active policy questions in taxation, inequality, growth, and finance. The research project investigating VAT on financial services will guide implementation of the policy in China and the design of the tax system in the EU. The project on inequality and growth will provide guidance on the distributional policies required as China transitions towards being a fully developed modern economy. The work on contributions to public goods will provide insight into a range of issues in the provision of public services.

The activities of the partnership will benefit a wider group than just the researchers on the project. The masterclasses and workshops will be open to researchers from outside the partnership which will allow the wider academic community in China, the UK, and outside to participate and benefit. The first international workshop is scheduled to coincide with the launch of the partnership. The partnership will also generate impact through building research capacity via the masterclasses and the direct engagement of junior researchers in the research.

The impact of improved policies through a better understanding of the aggregation consequences of behavioural preferences will be enhanced economic welfare. There are clear gains to the economy of a tax system that is well designed and public goods that are efficiently provided. Improved income distribution can increase social cohesion by enhancing the general perception of fairness in the economic allocation. Improved understanding of financial markets can guide both policy and the development of those markets so that they can be directed toward socially beneficial outcomes. These are salient impacts for public policy in China, the UK, and many other countries, given the increase in inequality in recent years and the experience of financial market failure.

The partnership will undertake activities and research of the highest standard that informs policy and will be published in leading academic journals. Workshops will provide opportunities for dissemination to a broad audience. The partnership's research will also be disseminated through presentations at seminars and international conferences. The masterclasses and workshops organised by the partnership will be opened to policy makers in order to enhance impact.