How Do Economic Incentives Affect Social Preferences and Behavior?
| How do economic incentives affect social preferences and behavior? | Human Behavior and Economic Policy | 11/4/2013 | | |
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Table of Contents Introduction 2 Overview of past research 3 Implications for policy 10 Conclusion 11 References 12
Introduction
For decades economic theories have relied heavily on the effectiveness of material incentives (Fehr & Gächter, 2001). According to the traditional exchange theory all people are exclusively motivated by their own material self-interest. It predicts that the introduction of a penalty will reduce the occurrence of the behavior that is subject to the fine. On the other hand it states that introducing a material incentive will lead to an increase of the behavior related to the bonus. Based on economic theory, incentives have become increasingly popular and are used to increase certain behaviors in various fields including environmental policy (Andersen & Sprenger, 2000; Barde & Smith, 1997; Baumol & Oates, 1988; Kahn, 1995; all cited in ThØgersen, 2003), household surveys (Singer, 2002) and education policy (Fryer, 2011). On the other side, penalties have been used to reduce free-riding (Feldman, Papadimitriou, Chuang, & Stoica, 2006), and crimes (Akerlof & Dickens, 1982). There is much evidence that supports the basic premise of economics that incentives are effective (Gibbons, 1997; Prendergast, 1999; Lazear, 2000; all cited in Bénabou & Tirole, 2004).
However, a large body of literature in psychology has shown that explicit incentives lead to decreased motivation and reduced performance in the long run (Deci & Ryan, 1985; as cited in Bénabou & Tirole, 2004). Titmuss (1970, as cited in Bénabou & Tirole, 2004) was the first who claimed that people might adopt a ‘market mentality’ when they are exposed to explicit economic incentives. He found that paying blood donors for donating blood could actually reduce supply. In the beginning there was
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Table of Contents Introduction 2 Overview of past research 3 Implications for policy 10 Conclusion 11 References 12
Introduction
For decades economic theories have relied heavily on the effectiveness of material incentives (Fehr & Gächter, 2001). According to the traditional exchange theory all people are exclusively motivated by their own material self-interest. It predicts that the introduction of a penalty will reduce the occurrence of the behavior that is subject to the fine. On the other hand it states that introducing a material incentive will lead to an increase of the behavior related to the bonus. Based on economic theory, incentives have become increasingly popular and are used to increase certain behaviors in various fields including environmental policy (Andersen & Sprenger, 2000; Barde & Smith, 1997; Baumol & Oates, 1988; Kahn, 1995; all cited in ThØgersen, 2003), household surveys (Singer, 2002) and education policy (Fryer, 2011). On the other side, penalties have been used to reduce free-riding (Feldman, Papadimitriou, Chuang, & Stoica, 2006), and crimes (Akerlof & Dickens, 1982). There is much evidence that supports the basic premise of economics that incentives are effective (Gibbons, 1997; Prendergast, 1999; Lazear, 2000; all cited in Bénabou & Tirole, 2004).
However, a large body of literature in psychology has shown that explicit incentives lead to decreased motivation and reduced performance in the long run (Deci & Ryan, 1985; as cited in Bénabou & Tirole, 2004). Titmuss (1970, as cited in Bénabou & Tirole, 2004) was the first who claimed that people might adopt a ‘market mentality’ when they are exposed to explicit economic incentives. He found that paying blood donors for donating blood could actually reduce supply. In the beginning there was
References: Akerlof, G. A., & Dickens, W.T. (1982). The Economic Consequences of Cognitive Dissonance. The American Economic Review, 72, 307-319. Benabou, R., & Tirole, J Bowles, S. (2008). Policies Designed for Self-Interested Citizens May Undermine “The Moral Sentiments”: Evidence from Economic Experiments. Science, 320, 1605-1609. Bowles, S., & Hwang, S.-H. (2008). Social Preferences and Public Economics: Mechanism design when social preferences depend on incentives Bowles, S., & Polanía-Reyes, S. (2012). Economic Incentives and Social Preferences: Substitutes or Complements?. Journal of Economic Literature, 50, 368-425. Cardenas, J.C., Stranlund, J., & Willis, C. (2000). Local Environmental Control and Institutional Crowding-Out. World Development, 28, 1719-1733. Fehr, E., & Fischbacher, U Fehr, E., & Gächter, S. (2000). Cooperation and Punishment in Public Goods Experiments. The American Economic Review, 90, 980-994. Fehr, E., & Gächter, S Fehr, E., & Rockenbach, B. (2003). Detrimental effects of sanctions on human altruism. Nature, 422, 137-140. Fehr, E., & K Feldman, M., Papadimitriou, C., Chuang, J., & Stoica, I. (2006). Free-Riding and Whitewashing in Peer to-Peer Systems. Journal on Selected Areas in Communications, 24, 1010-1019. Fryer, R.G. (2011). Teacher incentives and student achievement: evidence from New York City public schools (NBER Working Paper No. 16850). Gneezy, U., & Rustichini, A Gneezy, U., & Rustichini, A. (2000b). Pay enough or don 't pay at all. Quarterly Journal of Economics, 115, 791-810. Schotter, A., Weiss, A., & Zapater, I. (1996). Fairness and survival in ultimatum and dictatorship games. Journal of Economic Behavior & Organization, 31, 37-56. Singer, E. (2002). The Use of Incentives to Reduce Nonresponse in Household Surveys. In Survey nonresponse. Edited by: Groves RM, Dillman DA, Eltinge J, Little RJA. New York: Wiley:163-177.