Behavioral Public Economics: Social Incentives and Social Preferences, by ShinjiTeraji (Routledge, Canberra, 2022), pp. 205 pages + xii front matter

In an era when behavioural insights are increasingly shaping public policy, Shinji Teraji's Behavioral Public Economics: Social Incentives and Social Preferences offers a timely and rigorous reassessment of public economics. The book challenges traditional models that rely on self-interest and perfect rationality, arguing instead that incorporating social preferences, norms and identity is not merely a refinement but a necessary shift for understanding how public policy works in practice. The book moves beyond a broad survey of behavioural public economics, offering instead a sustained, theoretically rigorous argument for incorporating other-regarding preferences, norms and identity into core areas of public policy analysis. While at times mathematically and conceptually dense, making it most suitable for its intended audience of researchers and postgraduate students, the book successfully bridges the gap between abstract theory and concrete policy applications. Policy-makers with an interest in behavioural applications may find its policy examples illuminating, even if the formal modelling sections prove dense. Teraji's central thesis is that the standard Homo economicus model, with its assumptions of pure self-interest and perfect rationality, is inadequate for understanding and addressing many real-world policy challenges. The book builds this argument by first contrasting the traditional tools of public economics (optimal taxation, Pigouvian taxes, Coasean bargaining) with the findings of behavioural economics. Early chapters introduce key concepts like market failures, revealed preference theory, and expected utility theory, but quickly pivot to expose their limitations in light of behavioural anomalies. Concepts such as bounded rationality (drawing heavily on Herbert Simon), loss aversion, heuristics and biases (Kahneman and Tversky) and framing effects are introduced, setting the stage for later chapters that apply them to policy areas such as tax compliance, environmental regulation and corporate social responsibility. The application of these concepts is a particular strength of the book. The discussion of sin taxes, for instance, effectively contrasts the rational addiction model of Becker and Murphy with the time-inconsistent preferences approach of Gruber and Köszegi, highlighting the markedly different policy implications of each. The discussion of tax compliance and the importance of ‘tax morale’ is another illustrative example, demonstrating the limitations of relying solely on deterrence-based approaches. Beyond tax compliance and sin taxes, Teraji's exploration of how social norms shape environmental stewardship and corporate behaviour reveals underappreciated levers for policy innovation. A crucial focus of the book within behavioural public policy lies in its emphasis on the social dimensions of behaviour. Teraji moves beyond individual cognitive biases to explore how social preferences (inequality aversion, altruism, reciprocity), social norms (conventions, focal points) and identity shape economic decisions. The book demonstrates that these factors are not mere add-ons to the standard model, but rather fundamental drivers of behaviour that can significantly alter the effectiveness of policy interventions. The discussion of motivational crowding out – where extrinsic incentives can undermine intrinsic motivation, both in rewards and punishments, as seen in examples like blood donation and daycare centre fines – is a compelling real-world example. This section resonates strongly with behavioural public policy concerns, and one could have wished for its lessons to be woven more consistently throughout the book. Teraji presents several of his own original theoretical models of social preferences and social incentives, most notably in the last three chapters. These models are presented in a mathematically dense way to provide a formal framework for understanding how social preferences, norms and identity interact with economic incentives. For example, the model of norm evolution within organisations (Chapter 5) elegantly demonstrates how altruistic or envious social norms can become ‘locked in’, leading to persistent differences in organisational performance. Similarly, the models of common-pool resource management (Chapter 7) incorporate individual identity (selfish versus pro-environmental, with or without internal moral constraints) to show how these factors can influence resource sustainability, providing a behavioural extension of Ostrom's work. These models provide a valuable formal framework but, at times, read like reprints of his earlier work. For readers more interested in policy applications, the technical density here may feel excessive. This creates a noticeable shift in tone and accessibility compared to the earlier policy-oriented chapters. In conclusion, Behavioral Public Economics: Social Incentives and Social Preferences is a significant contribution to the field, compelling economists to reconsider the foundations of public policy design and offering policy-makers valuable insights into how social preferences shape the effectiveness of interventions. While excelling in theoretical exposition and model building, particularly in its presentation of Teraji's own research, the book could benefit from a stronger integration of empirical evidence and a more accessible presentation of its mathematically denser sections. Nevertheless, for those willing to navigate the formal models, the book offers a comprehensive and rewarding synthesis of behavioural insights and public economics, demonstrating the critical importance of understanding social incentives and social preferences for effective policy-making.