Tuesday, November 22, 2011

True Love and Other Times When Monetary Incentives are Misguided

In the Fall 2011 issue of my own Journal of Economic Perspectives, Uri Gneezy, Stephan Meier, and Pedro Rey-Biel" tackle issue of "When and Why Incentives (Don’t) Work to Modify Behavior." Many of their well-chosen examples made me smile, but none more than this one.

"Consider a thought experiment: You meet an attractive person, and in due time you tell that person, “I like you very much and would like to have sex with you.” Alternatively, consider the same situation, but now you say, “I like you very much and would like to have sex with you, and, to sweeten the deal, I’m also willing to pay you $20!” Only a certain kind of economist would expect your partner to be happier in the second scenario. However, offering $20 worth of (unconditional) flowers might indeed make the desired partner happier."

The authors point out: "Monetary incentives have two kinds of effects: the standard direct price effect, which makes the incentivized behavior more attractive, and an indirect psychological effect. In some cases, the psychological effect works in an opposite direction to the price effect and can crowd out the incentivized behavior." They investigate these potential conflicts in three situations: incentives for students to learn; incentives to contribute to public goods (like being a blood donor); and incentives to make lifestyle changes like to start exercising or to quit smoking.

Here's their summary of their findings: "When explicit incentives seek to change behavior in areas like education, contributions to public goods, and forming habits, a potential conflict arises between the direct extrinsic effect of the incentives and how these incentives can crowd out intrinsic motivations in the short run and the long run. In education, such incentives seem to have moderate success when the incentives are well-specified and well-targeted (“read these books” rather than “read books”), although the jury is still out regarding the long-term success of these incentive programs. In encouraging contributions to public goods, one must be very careful when designing the incentives to prevent adverse changes in social norms, image concerns, or trust. In the emerging literature on the use of incentives for lifestyle changes, large enough incentives clearly work in the short run and even in the middle run, but in the longer run the desired change in habits can again disappear. ... A considerable and growing body of evidence suggests that the effects of incentives depend on how they are designed, the form in which they are given (especially monetary or nonmonetary), how they interact with intrinsic motivationsand social motivations, and what happens after they are withdrawn. Incentives do matter, but in various and sometimes unexpected ways."