Policymakers often introduce programs to encourage businesses to adopt environmentally friendly practices. In this blog, Manuel Grieder, Deborah Kistler and Jan Schmitz draw on a field experiment with small and medium-sized enterprises (SMEs) in Switzerland, and explain that even minor administrative hurdles – known as “sludge” – can significantly reduce take-up of sustainable practices.
Sludge: The Hidden Barrier to Policy Success
Governments worldwide invest in policies that aim to reduce environmental impact, often targeting small and medium-sized enterprises (SMEs). SMEs constitute the vast majority of businesses in most economies and are responsible for a significant share of environmental pollution. To support these firms, policymakers provide funding, consulting, and resources to help them transition to more sustainable practices.
But do these policies work as intended? Our study suggests that the effectiveness of a policy intervention depends not only on its content but also on seemingly minor frictions in its implementation. These frictions – what behavioural scientists call “sludge” – can dramatically reduce adoption, even when the potential benefits for firms are clear.
Sludge can take many forms: cumbersome application procedures, excessive paperwork, or unnecessary decision-making steps. While such obstacles may seem trivial, their effects can be substantial.
A Field Experiment on SME Participation in Environmental Programs
To understand the impact of sludge, we conducted a field experiment in collaboration with a Swiss environmental program for SMEs. The program offered free consulting sessions where experts analysed business operations and recommended ways to improve environmental sustainability.
To facilitate immediate action, in our experiment participating businesses were also offered the possibility to order and receive free green items such as recycled paper, water-saving nozzles, or LED fluorescent tubes. These items support the implementation of commonly recommended energy and resource efficiency measures. While the direct impact of each item may be limited, their cumulative effect can contribute to significant reductions in energy and resource consumption over time.
After indicating their wish list to the consultant, we randomly divided 173 participating businesses into two groups:
- Direct Order Group: Consultants ordered the resources on behalf of the SMEs, eliminating any extra effort on their part. This group comprised 86 firms.
- Sludge Group: SMEs were provided with a simple online ordering process, requiring them to place orders themselves on a designated website. There were 87 firms in this group.
At first glance, both groups appeared equally motivated: around 90% of SMEs in each group expressed interest in obtaining at least some of the green items. However, actual ordering behaviour told a completely different story.
How a Simple Extra Step Halved Participation
The results were striking: in the Direct Order Group, 92% of SMEs received free green items. In contrast, in the Sludge Group, where businesses had to place their own orders, only 52% followed through and actually ordered and thus received the green items.
Figure 1: Intention to order and actual order rates for the Direct Order and Sludge Groups
Source: Grieder, Kistler and Schmitz (2024). Notes: Error bars represent plus/minus one binomial standard error of the mean. Direct group: n = 87, Sludge group: n=86.
The mere requirement to complete a simple online order – an objectively minor hurdle – reduced uptake by nearly half. This suggests that even small non-monetary costs can have a major impact on the success of policy interventions targeted at small businesses. Policymakers should recognize that reducing sludge is not just about convenience: it plays a crucial role in ensuring policy effectiveness.
Our field experiment involved a self-selecting group of firms who we might assume have some interest in environmental sustainability – even so, a minor friction yields a large effect on adoption of sustainable practices. It is possible that the negative effects of sludge could be even higher for firms who lack intrinsic pro-environmental motivation and readiness to change business practices.
Why Studying Sludge in Firm-Focused Policies Matters
Our study is among the first to provide causal evidence on the impact of sludge in a policy program targeted at firms. Firms are often assumed to behave more rationally than individuals, making it particularly noteworthy that even for firms, minor frictions can significantly reduce participation rates. While research has previously documented the effects of sludge on individuals, our findings demonstrate that businesses are not immune to these barriers.
Indeed, SMEs may be especially vulnerable to the effects of sludge. Unlike larger firms, they typically have fewer resources and limited administrative capacity, making additional procedural requirements a significant burden. When forced to navigate cumbersome processes, SME decision-makers may deprioritize participation in environmental programs, even when the benefits are clear. Given these findings, policymakers should take a proactive approach to reducing sludge.
Our results underscore the importance of testing policy interventions before their broader implementation. Many policies may fail not because they are inherently flawed but due to small, unintended frictions in program design. Pilot experiments and small-scale trials should be conducted before rolling out new programs to ensure that choice architecture supports, rather than hinders, adoption. Identifying and eliminating these frictions in advance can significantly enhance policy effectiveness.
However, sludge may also be present in already long-standing programs. Another promising strategy is therefore to conduct sludge audits—systematic evaluations of existing public programs to identify and remove unnecessary obstacles. A sludge audit should include:
- Mapping decision points: Identifying all steps participants must take to access program benefits.
- Measuring drop-off rates: Analysing where potential participants abandon the process.
- Testing streamlined alternatives: Experimenting with different program structures to minimize unnecessary effort.
In short, pre-implementation experimental testing and sludge audits of existing programs should become standard practices in policy design, particularly for programs targeting SMEs.
Designing Policies That Work
Our research demonstrates that small frictions in decision-making processes can significantly undermine the effectiveness of public policies. If policymakers are serious about tackling climate change and encouraging sustainable business practices, they must go beyond incentives and funding—they must also minimise sludge.
Through pre-implementation experimental testing and sludge audits, policymakers can minimise unnecessary frictions and ensure that well-intended policies achieve their full potential. Because in the end, even the best-designed intervention can fail if the path to participation is just a little too difficult.
For more details, read the full study here.
Manuel Grieder is a Tenure Track Assistant Professor at UniDistance Suisse. His research explores decision-making in organizations and markets, applying a behavioural perspective to topics such as cooperation, ethical behaviour, and sustainability. He holds a PhD in Economics from the University of Lausanne and was a postdoctoral researcher at ETH Zurich, with a research stay at MIT. He also lectures at the University of Lausanne and ZHAW.
Deborah Kistler is a lecturer and impact measurement expert at the University of Zurich. She leads a newly established initiative at the university that promotes evidence-based decision-making in international cooperation. The initiative aims to build a bridge between researchers and practitioners working in the field. She holds a PhD from the University of Lausanne.
Jan Schmitz is an Assistant Professor (with tenure) at Radboud University in the Netherlands. His research uses lab and field experiments to examine how economic conditions—such as inequality and uncertainty—shape social preferences. He holds a PhD in Economics from the University of Hamburg and, before joining Radboud, was a postdoctoral researcher at the University of Lausanne and ETH Zürich.