This economic theory can change fire-code compliance
Behavioral economics is an emerging trend that fire chiefs can use to improve fire-safety behavior
By Matt Hinds-Aldrich, Ph.D.
The fire service has long struggled with the fundamental question of how to encourage fire code compliance in commercial occupancies. The traditional approach to code compliance is to use warnings and fines to incentivize compliance and punish noncompliance.
One emerging trend that could change all of that is behavioral economics.
Historically economists assumed that people employ a thorough cost/benefit analysis before engaging in any behavior or making any decision. Thus, when deciding what to eat for dinner the rational actor considers the total cost of the meal, the potential health implications of the various options and the nutritional value of the food.
As someone who has likely confronted a similar decision several times in the past day, you will recognize that there are many other factors — some more emotional than rational — that guide food choices. Moreover, many of the true costs are either unknown or difficult to measure.
One need not be an economist to recognize that some of the key assumptions simply do not play out in practice.
As these fundamental assumptions became increasingly unwieldy, a new school of economists focused on how people actually engage in economic decision-making. Behavioral economics highlighted that small but immediate short-term costs and benefits tend to counter-intuitively serve as stronger motivators than larger but distant costs and benefits.
As Craig Lambert at Harvard notes, low 401k participation rates, where an employee has to sacrifice a small amount of immediate financial freedom to take advantage of greater financial resources down the road, highlights the phenomenon and the need to change the incentive structure.
Since pension plans roll those deposits into disbursements, low participation threatens plan solvency and people with inadequate pension savings are likely to rely more heavily on government assistance when they retire.
When behavioral economists began to identify how people make decisions in practice, they realized we could reverse engineer decision-making to encourage people to make the decisions we want them to make.
For instance, many grocery stores place name-brand products with the highest profit margins at eye level and the lower-margin store brands slightly out of reach — knowing that many customers will grab the product that is the easy to see and access — thus subtly engineering their customer's decision-making.
Similarly, Internet retailers noted that the vast majority of people go with whatever the default option is, so they changed their wording to require customers to "opt-out" of receiving third-party marketing materials.
The public health field has also begun to embrace these concepts as a way to encourage the public to make healthy decisions. Here the focus is upon encouraging or nudging the public into particular positive behaviors that fit with organizational, social or health-related goals.
While the traditional approach may be to simply remove negative or unhealthy options to eliminate the possibility of people making bad choices, the reaction and backlash against the removal of personal choice is likely to encounter considerable social resistance.
Behavioral economics, on the other hand, acknowledges that choice is important, but by considering how and why people make unhealthy or bad choices the invisible hand can encourage and reward particular positive choices. This is what Richard Thaler and Cass Sunstein call Nudge Theory.
For example, in England several local councils noted that if outdoor exercise equipment were made freely available public parks, residents would be more apt to engage in cardiovascular exercise.
Subsequent research demonstrated that 26 percent of the people using these adult playgrounds had not previously exercised regularly, suggesting that the approach might help reduce health care costs.
With noted behavioral economists like Larry Summers serving as economic advisors in the White House, these approaches are finding their way into government policy in the United States as well.
Rethinking fire code compliance
When it comes to fire codes, the reasoning follows that if the threat or fines does not gain compliance (since the cost of the fine may be less than the potential profits the business gains from noncompliance), then the fines should be increased until they are high enough to force compliance.
Yet, it is likely that if fines are raised to outweigh potential profits, noncompliant business owners would simply contest and appeal the fine legally or contact their elected leaders to interject on their behalf.
Regardless, this approach fosters an adversarial relationship between the business owner and the fire department, which runs counter to the goal of encouraging fire code compliance.
Using bars and nightclubs as an example, in the wake of devastating fires like the Station Nightclub fire, fire code compliance might be encouraged by rethinking the incentive structure.
Occupancies that serve or sell alcohol must maintain a liquor license in order to operate; thus, anything that threatens their ability to retain a liquor license is likely to get their attention. So establishments with liquor licenses are ideal for a behavioral economics approach as it relates to code compliance.
Here the idea is to change the fee structure to reward compliance (in addition to continuing to punish noncompliance through the threat of fines).
Presume the annual liquor license renewal fee in an exemplar state is normally $2,500 per year. In this proposed model, the annual renewal fee would be raised to $10,000 per year, which is likely to create quite uproar.
Yet, this increase is fundamental, as the model is based upon discounts to the renewal fee for documented fire and public safety compliance. Using this model, the business owner can apply for a $2,500 discount for passing an unannounced fire and life safety inspection within the previous year (using specific inspection criteria and guidelines on what constitutes major and minor violations).
The business could also apply for $2,500 discount for having an NFPA compliant sprinkler system with a certified inspection within the previous year as well as a final $2,500 discount for documentation from the respective law enforcement agencies that there were no criminal, public nuisance, or alcohol license violations within the previous year.
Ultimately, those bar or nightclub owners who operate in a responsible manner and take responsibility for fire-safety compliance will likely get the maximum discount rate, which brings the discounted fee to the original rate — $2,500. Bar and nightclub owners who do not take responsibility for fire and life safety in their premises will have to pay the higher rate and would still be legally liable for violations and fines.
This use of a behavioral economics approach ties fire code compliance to a tangible asset and rewards good behavior as well as puts the responsibility for maintaining, demonstrating and documenting fire code compliance more squarely on the shoulders of the premises owner not simply the fire department.
By studying how and why people make specific decisions and actions, it is possible to encourage, or nudge, them into positive choices that can impact the safety and health of our communities. Here, we can learn a lot from the private sector in terms of how to adapt our marketing, prevention and reimbursement models based upon how our customers and constituents make decisions.