How Sludge Impairs the Effectiveness of Policy Programs : A Field Experiment with SMEs

Small and Medium-sized Enterprises (SMEs) make up the largest share of companies in most economies. They are major users of resources and cause a large share of environmental pollution, which makes them relevant targets for public policy programs aiming to increase their sustainability. We study how ``sludge" in the form of small frictions in the choice architecture can have an important impact on the uptake and the effectiveness of such public policy programs targeted at SMEs. To do so, we conducted a field experiment within an existing governmental program in Switzerland that aims to support SMEs in the implementation of cost-effective environmental management practices. We slightly manipulated the process of receiving initial benefits to implement such environmentally-friendly practices in a firm. We find that sludge in the form of minor additional effort required to receive benefits substantially undermined the effectiveness of the program. Our findings carry important implications for policymakers: Even minor sludge in the choice architecture may seriously harm the effectiveness of public policy programs targeted at companies