This research area addresses the question of how to design policies that incentivize consumers and firms to behave in such a way that allows the attainment of specific policy goals. Hence, the unifying theme of the specific research projects within this area is a well-founded, systematic analysis of the feasibility of attaining particular policy goals together with the constraints faced to achieve them. Here, we provide an explicit and systematic description of both the objectives and the constraints that underlie specific policy design questions.
The specific objectives and constraints depend on the precise context determined by the policy in question, which is manifest in the research diversity in this area. For instance, the policy objective directly concerns the products quality for those projects that focus on safety and health issues. Whereas for other research projects – e.g., the design of competition policies – the use of a more general welfare objective such as consumer surplus or aggregate surplus is more appropriate. Further, the constraints imposed by the different instruments depend on the exact policy problem. Specifically, they depend on how consumers and firms respond to different types of incentives. Consequently, this research area builds on research area I, which studies consumer and market behavior and allows us to understand their reactions to incentives. Additional crucial constraints depend on the specific context such as the restrictions on the available policy instruments, the instruments’ flexibility, limitations on the enforceability of specific policy rules, and finally the limits on the information structure of consumers, firms as well as policy makers.