Strategic Inertia and Institutional Change:A Behavioral Model of Price Reforms versus Action Deletion

TL;DR

This paper models why inefficient practices persist despite better options, showing that banning default actions can be more effective than taxing them, with implications for policy design.

Contribution

It introduces a behavioral model incorporating status-quo bias and switching costs, demonstrating conditions where banning defaults outperforms taxation in policy interventions.

Findings

A threshold tax level exists for maintaining the status quo.

Deleting default actions always leads to the superior equilibrium.

Banning defaults yields higher welfare when the superior equilibrium is Pareto-dominant.

Abstract

Why do inefficient practices, technologies, or institutions persist even when su perior alternatives are available? This paper introduces a quantal response equilib rium with status-quo bias (QRE-SB) in which each player incurs a fixed switching cost when deviating from an inherited default action. In a binary coordination game, we compare two policy interventions: a tax on the default action (price-only reform) versus deleting the default action entirely (ban). We prove that there exists a threshold tax below which the status quo persists and above which a transition occurs; notably, this threshold does not depend on the degree of bounded ratio nality. Deleting the default action always forces play to the superior equilibrium, irrespective of switching costs or rationality. Moreover, when the superior equilib rium is Pareto-dominant, deletion yields strictly higher expected welfare than any finite tax that leaves the old action feasible. Numerical simulations illustrate the theoretical predictions. The framework provides a formal foundation for the policy principle that sometimes you must ban, not just tax, with direct applications to climate policy, social media regulation, and international sanctions.