Mechanism design for personalized policy: A field experiment incentivizing behavior change

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Personalizing policies can theoretically increase their effectiveness. However, personalization is difficult when policies are vertically-differentiated and beneficiaries' types are unobservable, since beneficiaries may misreport their types to access the most generous policy variant. Mechanism design offers a strategy to overcome this issue: offer a menu of policy choices, and make it incentive-compatible for participants to choose the "right' variant (i.e., 2nd-degree price discrimination). Using a randomized controlled trial of incentives for exercise among roughly 6,000 adults with diabetes and hypertension in urban India, we show that 2nd-degree price discrimination substantially improves program performance, increasing the treatment effect on exercise by 75% without increasing program costs relative to a one-size-fits-all benchmark. Second-degree price discrimination is effective because, consistent with mechanism design theory, it induces beneficial sorting of types across contracts. Second-degree price discrimination also performs favorably relative to another potential strategy for personalization: tagging based on observables (i.e., 3rd-degree price discrimination).