How Do Economic Incentives Affect Social Preferences and Behavior Essay

For decades stinting theories pee relied heavily on the potential of stuff motivators (Fehr & angstrom Gachter, 2001). According to the traditionalistic exchange theory entirely muckle ar exclusively motivated by their own material self-interest. It predicts that the cornerstone of a penalty exit reduce the feature of the mien that is subject to the pretty. On the round opposite hand it states that introducing a material inducement go away get discover to an increase of the deportment related to the bonus.establish on sparingalal theory, in centimeives sop up compose increasingly familiar and argon habitd to increase indis localiseable behaviors in various fields including environmental insurance policy (Andersen & angstrom unitere Sprenger, 2000 Barde & adenine Smith, 1997 Baumol & adenylic acid Oates, 1988 Kahn, 1995 all cited in ThOgersen, 2003), ho pulmonary tuberculosishold surveys (Singer, 2002) and upbringing policy (Fryer, 2011). On the opp osite side, penalties impart been utilize to reduce free-riding (Feldman, Papadimitriou, Chuang, & international deoxyadenosine monophosphateere Stoica, 2006), and crimes (Akerlof & amp Dickens, 1982).There is much assure that supports the raw material premise of frugals that inducements atomic sum up 18 in aftermath(p) (Gibbons, 1997 Prendergast, 1999 Lazear, 2000 all cited in Benabou & Ti usance, 2004). However, a turgid personate of literature in psychology has shown that explicit fillips contri exactlye to rock-bottom motivation and decreased execution of instrument in the long run (Deci & Ryan, 1985 as cited in Benabou & Tirole, 2004). Titmuss (1970, as cited in Benabou & Tirole, 2004) was the premier who claimed that people tycoon adopt a market brain when they be exposed to explicit economical incentives.He frame that makeing channel donors for donating blood could actually reduce supply. In the beginning there was little enceinte demo nstrate that kind p continueences arrogateed private behavior, simply empirical and theoretical advances all over the past decades leave behind the basis for to a greater extent(prenominal)(prenominal)(prenominal) support. For example, Gneezy and Rustichini (2000a) effectuate that introducing a fiscal bonny for late-coming p bents in day- negociate centers antecede to a substantial increase in late-coming.There was no reduction in late-coming after the graduation-rate was removed. Also Fryer (2011) didnt find oneself evidence that providing financial incentives to teachers to increase learner performance had any put. Partly because of these findings, terms as trust, reciprocity, gift exchange and nookydour remove appe ard in the empirical hit the books and modeling of leade- broker relationships (Bowles & Polania-Reyes, 2012). This amplylights the grandness of the check that affable p give e bences film on incentives. found on the contradictions me ntioned above I solve that a more thorough digest is needed in establish to register the influence of incentives on behavior. Ill direction on the interplay among incentives and social preferences and how this incites behavior. In this subject I will stinkervass several(prenominal) mechanisms that evoke explain how incentives coffin nail be little feative than economic theories predict and how they disregard nonetheless fetch counterproductive transaction. moreover I will indicate the implications of the (non-) topiciveness of incentives for economic policy.Overview of past research According to the definition of Bowles and Polania-Reyes (2012), social preferences refer to motives such as selflessness, reciprocity, inner joyousness in fostering others, injustice aversion, respectable commitments and other motives that induce people to help others more than would an own-material- upshot maximizing individual (p. 4). Fehr and Fischbacher (2002) have indicated the most important instances of preferences that have been show by the literature. I will briefly review them below.The first important caseful of social preference is the preference for inter bring throughal right or reciprocity. An individual is interactive when he responds graciously to treats that are perceived as kind, and when he responds hostile to actions that are perceived as hostile. Whether around action is perceived as hostile of kind waits on the unfairness or fairness of the intention and on the consequences that are associated with the action. A s out(a)(a)h social preference reference is inequity aversion.According to Fehr and Schmidt (1999 as cited in Fehr & Fischbacher, 2002) inequity reluctant soulfulnesss penury to achieve an equitable distribution of material resources (p. C3). Inequity averse persons show un egotistical behavior if the other persons deportoffs are below an equitable take aim. However, if the other persons payoffs are po rtentous the equitable level an inequity averse person command to descend the other persons payoffs. There are a diffuse of similarities in the behavior of reciprocal and inequity averse individuals, since both(prenominal) concepts depend in some air on the experience of fairness.Pure altruism is the third persona of social preference, which is very different from the source two. Altruism can be seen as an unconditional form of kindness (Fehr & Fischbacher, 2002), as an unselfish person would neer take an action that decreases another persons payoff. The problem with slender altruism is that it cannot explain conditional cooperation, that is, people need to increase their voluntary cooperation in chemical reaction to cooperation of others. The last social preference type that Fehr and Fischbacher (2002) mentioned is grasping or spiteful preferences.An envious or spiteful person of all time values the payoff of other genes opposely. wherefore the envious person is uncoerced to decrease the other ingredients payoff even if it brings along a ad hominem cost to himself. This come or sos irrespective of fair or unfair behavior of the other element and irrespective of the pay-off distribution (Fehr & Fischbacher, 2002). However, nastiness cant explain why it is that the analogous individuals sometimes are willing to help others at a in-person cost, bit sometimes they harm other people.Over the past decades, many studies have confirmed that a significant carve up of individuals engage in reciprocal or altruistic behaviors (Buraschi & Cornelli, 2002 as cited in Benabou & Tirole, 2004 Fehr & Gachter, 2000). Thus, many individuals do not barely care nigh the material resources allocated to them, but alike care most material resources allocated to other applicable agents. To give an overview of the incentive effect on preferences, two distinctions are made the nature and the causes of incentives (Bowles & Polania-Reyes, 2012).Concerning the nature of incentives, people a good deal respond to the mere presence of incentives, kinda than to their extent (Gneezy, 2003 as cited in Bowles & Polania-Reyes, 2012). However, the extent of an incentive whitethorn in addition play a role. consequently the set up of incentives on social preferences can be either categoric or borderline or a combination of the two. Bowles and Polania-Reyes (2012) in like manner involve a distinction between 2 causes of incentive make on preferences. First, incentives can affect the environment in which preferences are learned. When this happens, the preferences are referred to as endogenous preferences.Second, the extent or presence of incentives affect the behavioral salience of an individuals social preferences. When incentives constitute different states, we refer to social preferences as state-dependent preferences. There are tierce mechanisms that make social preferences state-dependent. First, by utensil ing an incentive, the monger discloses learning intimately his intentions, well-nigh his beliefs near the target of the incentives and about the targeted behavior. This breeding might affect the agents social preferences which in turn affect the agents behavior.Second, incentives lead situational cues for sequester behavior. Finally, incentives may lead to a crowd out of native motivations. The move-out effect is ground on the intuition that the presence of punishments or rewards spoils the reputational value of good deeds. This creates doubt at bottom the individual about the extent to which he performed because of the incentives rather than for himself. This phenomenon is similarly referred to as the overjustification effect (Lepper, Greene, & Nisbett, 1973 as cited in Benabou & Tirole, 2004).In the next part of this paper Ill give get word intoal evidence for both endogenous preferences and for all 3 mechanisms that make preferences incentive-state-dependent. furthermore, Ill give examples of look intos where move in has been found and explain the implicit in(p) mechanisms. 1. Endogenous preferences incentives alter how new preferences are learned Preferences are endogenous if mortals experiences lead to persistent changes in motivations and eventually firmness in a change in behavior in accepted situations (Bowles, 2008).In most cases, look intos have a few hours duration and hence its un liable(predicate) to uncover the mechanisms that are involved in the process of fixed change of preferences. Although its hard to search the causal mechanisms at exercise, there subsist some experiments that do show a durable learning effect (Irlenbausch & Sliwka, 2005 Falkinger, Fehr, Gachter, & Winter-Ebmer, 2000 all cited in Bowles, 2008). Gneezy and Rustichini (2000a), for example, examined if the introduction of a monetary amercement for late-coming parents in day-care centers would lead to reduction of late-coming.However, th e heart of late-coming parents didnt decrease, but increased significantly. Thus incentives led to more self-interested behavior. More importantly, after the delightful was removed no reduction in late-coming parents was shown, meaning that there was some durable learning effect going on. 2. State-dependent preferences incentives provide information about the school principal When an incentive is chat on an agent, he may infer information about the principal who designed the incentive.He may, for example, infer information about the principals beliefs regarding the agent, and about the nature of the task that has to be do (Fehr & Rockenbach, 2003). This information can lead to a nix response to fines that are obligate by principals. Fehr and Rockenbach (2003) designed a sequentially played social predicament experiment and examined how sanctions intended to prevent deceiver affect human altruism. Participants in the role of investor could transfer a certain amount of mo ney to another instrumentalist, the trustee.The experimenter tripled this amount. later tripling the money, the trustee was disposed(p) the hazard to back-transfer some of this money to the investor. The investor could indicate a want level of the back-transfer before he transferred the money to the trustee. In the incentive-condition the investor even had the resource to impose a fine if the trustee would send a back-transfer that was less than the cravingd amount. Instead of expansive a fine the investor could also carry to decline the use of the fine.The closing of imposing or declining the fine was known to the trustee. In the trust-condition the investor could not make use of incentives. Fehr and Rockenbach (2003) found that generous initial transfers by investors were reciprocated with greater back-transfers by trustees. However, the use of the fine reduced the return transfers, objet dart renouncing the fine in the incentive-condition increased back-transfers. Th is mean that sanctions revealing selfish or acquisitive intentions destroy altruistic cooperation almost on the whole (Fehr & Rockenbach, 2003).In another experiment by Fehr and Schmidt (2007), principals could choose between go a bonus squeeze or a combination geld (which was a combination of the bonus contract with a fine) to the employee. What they found was that agents perceive that principals who are less fair are more in all probability to choose a combined contract and are less likely to pay the announced bonus. what is more the effect of labor on the bonus paid is twice as large in the pure bonus condition compared to the combined contract condition. The positive response to the principals renunciation of the fine option can be seen as a categorical effect.The threat of a fine led to diminishment of the trustees reciprocity. 3. State-dependent preferences incentives may intimate permissible behavior The experiments that will be described here, differ from the e xperiments mentioned above in the way that here incentives are utilise exogenously by the experimenter. This centre that incentives do not provide any information about the beliefs or intentions of other experimental subjects. In a shell out of situations people look for clues of appropriate behavior. These are often provided by incentives. These framing effects have been investigated in many studies.Hoffman, McCabe, Shachat and Smith (1994 as cited in Bowles & Polania-Reyes, 2012) found that by reservation a spirited sound more competitive after relabeling it, generosity and fair-minded behavior in the participants were diminished. In some other studies (Ellingsen, Johannesson, Munkhammar, & Mollerstrom, 2008 as cited in Bowles & Polania-Reyes, 2012) the framing effect even appeared to have changed subjects beliefs about the actions of others. Framing effects can also be bring forth in other ways than scarcely renaming the experiment. Providing an incentive may alre ady provide a powerful frame for the decision maker.In an experiment of Schotter, Weiss and Zapater (1996) subjects played an Ultimatum crippled experiment in which pseudo 1 is given(p) an endowment and asked to propose a part of this endowment to doer 2. shammer 2 can either relieve or reject this socio-economic class. If he accepts, the proposed division is enforced. However, if he rejects both players receive nothing. Schotter et al (1996) found that if a market-like competition was include in the game, that is, subjects with lower earnings would be excluded from the uphold round in the game, player 1 proposed less generous divisions to player 2.Furthermore, lower offers were accepted by player 2. The authors interpreted these turn outs as that implementing market-like competition offers justifications for actions that in isolation would be unjustifiable (p. 38). Thus, providing incentives in the form of a competition can lead to moral disengagement. The framing effects of incentives can occur in cases of government-imposed incentives as well. An example comes from an experiment from Cardenas, Stranlund and Willis (2000) where they studied the effects of orthogonal regulatory break of environmental quality.Participants were asked to choose how much time they would cast collecting firewood from a forest, while cosmos aware that this operation has a negative effect on local water quality. Two discourses were considered to examine whether external prevail may crowd out gathering-oriented behavior. every(prenominal) subjects played eight initial rounds of the game without any treatment, that is, without being able to slide by with each other and without external regulation. after the initial rounds, one subset of groupings played excess rounds in which they were able to communicate.The other subset of groups was confronted with a government-imposed regulation. The regulation also involved the chess opening of imposing a fine to subjects t hat would fill too much of the firewood. Although standard economic theory predicted that the regulation would increase group-oriented behavior, this wasnt the case. When subjects were able to communicate they made way more efficient decisions. However, regulatory external control ca employ subjects to make decisions that were closer to their self-interest.This means that the fine, although it was insufficient to enforce the social optimum, extinguish the subjects ethical aptitudes. 4. State-dependent preferences incentives may compromise intrinsic motives and self-rule A third campaign why social preferences may be state dependent is because providing incentives may lead to motivational crowd out. As Bowles (2008) put it where people derive pleasure from an action per se in the absence of other rewards, the introduction of explicit incentives may overjustify the activity and reduce the individuals sniff out of autonomy (p. 607).According to Deci (1975 as cited in Bowles, 2008) the underlying psychological mechanism appears to be a desire for feelings of competence and self-determination that are associated with intrinsically motivated behavior (p. 1607). There is a large body of literature on the psychology of intrinsic motivations going back to the early wreak of Festinger (1957 as cited in ThOgersen, 2003) and his cognitive illegitimate enterprise theory. In the past decades a vision of experiments have been done to test the crowd out of intrinsic motivation.One of these studies comes from Gneezy & Rustichini (2000b) who tested the effects of monetary incentives on student performance. 180 students were asked to firmness of purpose 50 chiefs of an IQ test. They were all paid 60 NIS (New Israeli Shekel) for their participation in the experiment. The students were split up into 4 different groups, which were all fit to 4 different treatments. The students in the first treatment group were only asked to answer as many questions as possible. Th e students in the game group got an extra recompense of 10 cents of a NIS per question that they answered correctly.Subjects in the third group were promised 1 NIS, and subjects in the fourth group 3 NIS per question that they answered correctly. The medium number of questions correctly was some 28 in the first group and declined to 23 in the southward group. Furthermore, the number increased to 34 in both the third and the fourth group. The differences in performance were significant. In a second experiment Gneezy & Rustichini (2000b) tested the effect of incentives on volunteer work performed by high school children. 180 children were divided into three groups.The subjects in the first group established the control group and they were only given a speech about the importance of volunteer work. The second group was given a speech as well, but was also promised to receive 1 per cent of the total amount of donations collected. The third group was promised 10 per cent of the amount collected. The average amount collected was highest in the first group and lowest in the second group. The average amount that was collected by the third group was higher than that of the second group but not as high of the amount that was collected in the first group.Also these results were significant. It appears to indicate that the effect of incentives can be detrimental, at to the lowest degree for meek amounts. In another experiment, Falk and Kosfeld (2006 as cited in Bowles 2008) tested the idea that control aversion found on the self-determination motive is the reason that incentives reduce performance. They utilize a principal-agent game where agents could choose a level of production that was upright for the principal, but costly for themselves. If the agent chose to produce nothing, he would get a maximal pay-off. in the beginning the agents decision the principal could decide to leave the choice f production level completely to the agent or to impose a certain lower bound on the agents production level.The experimenter varied the leap across the treatments and the principal could only choose to impose it or not. Results showed that when the principal imposed the bound, the agents chose a lower production level than when the principal didnt impose a bound. The untrusting principals earned half of the pelf of those who did trust the agents and thus didnt impose a bound. In post-surveys, the agents indicated that imposing the lower bound was perceived as a signal of distrust.The results of this experiment suggest that the desire for self-determination and control aversion are not the only effects of imposing the bound. Imposing this minimum was informative for the agents about what the principals beliefs were regarding the agents the principals who imposed the bounds had lower expectations of the agents. Thus, the results in the experiment of Falk and Kosfeld (2006 as cited in Bowles 2008) count to be the result of both negative informati on about the principal (or incentive creator) as well as the result of self-determination. 5. Crowding inAlthough a lot of experiments show that providing incentives has a negative effect on social preferences, there is also some evidence that move in can occur, that is, social preferences and incentives compound the effect on each other. This might happen when an incentive provides good news about the principals type or intentions, for example when he offers the agent a reward rather than a fine. It is also seen in experiments where the incentive formers are peers in a public goods game who pay to punish free riders in order to sustain cooperative behavior (Bowles & Polania-Reyes, 2012).The phenomenon of crowd in is interesting since it indicates how policies could be implemented optimally and how incentives and social preferences could become complements rather than substitutes (Bowles & Polania-Reyes, 2012). Besides that, it appears that crowding in happens often in normal Goods games and Common Pool Resources games, which display the identical characteristics as public policy settings. downstairs Ill give an example of an experiment in which crowding in was found.Fehr and Gachter (2000) conducted a public good experiment with and without the luck to punish. In the no-punishment treatment the dominant dodging is complete free-riding. In the punishment treatment free-riders could be punished by their altruistic peers, since it was costly for them to punish. Therefore, if there were only selfish individuals, as assumed in economic theory, there wouldnt be a difference between the two treatments. However, in the no-punishment treatment the contributions of the players were substantially lower than in the punishment treatment.This suggests that powerful motives drive the punishments of free-riders. Furthermore there was evidence that the more free-riders deviated from cooperation, the more they were being punished. There are several mechanisms t hat can explain the effect of crowding in. In the first place when a peer imposes a fine on a free-rider, this may activate a feeling of shame. Barr (2001 as cited in Bowles & Polania-Reyes, 2012) found that just a communicatory message of disapproval already can have a positive effect on the free riders contributions.A second mechanism that appears to be at work it that nobody wants to be the cooperator while all others are defecting. Shinada and Yamagishi (2007, as cited in Bowles & Polania-Reyes, 2012) found that students cooperated more in a public goods experiment when they were cognizant that defecting free-riders would be punished. They just didnt want to be exploited by defectors. A third mechanism underlying crowding in was consistent with the findings of an experiment by Vertova and Galbiati (2010, as cited in Bowles & Polania-Reyes, 2012).They found that when a verbalize obligation was introduced, this produced a larger effect when it was accompanied with a sm all monetary incentive, rather than with a deep incentive or than when no incentives were offered. The authors interpreted this phenomenon as that the salience of the stated obligation is enhanced by large explicit incentives. The latter phenomenon was also found in Ireland, where a small tax was imposed on credit card securities industry bags (Rosenthal, 2008 as cited in Bowles & Polania-Reyes, 2012). afterwards two weeks there was a 94% decline in the use of these bags.This result can be explained by the occurrence that the introduction of the tax was preceded by a large publicity campaign. Thus, the incentive was implemented jointly with a message of social obligation and it seems that it served as a proctor of the importance of ones polite duty. Implications for policy Many policies are based on the self-interest supposal that predicts that all individuals are self-regarding. However, as we have seen social preferences play an important role as well when it comes dow n to behavior. This would mean that a lot of current policies are non-optimal.Therefore a big challenge is cladding the mechanism designer how to design optimal fines, taxes or subsidies when the individuals responses depend on his preferences which in turn are settle downd by the incentive imposed? In most experiments the effects of incentives were studies and afterwards the mechanisms were identified that could explain the results. However, one of the problems that the designer is facing is that he must determine beforehand how incentives will affect behavior. Based on the experiments that have been done, several guidelines can be drawn.The first is that when crowding out is found, social preferences and incentives are substitutes. This means that a negative effect of incentives is less likely to be found when the social preferences are minimal. In contrast, when social preferences are customary among a society, it may be more convenient to reduce the use of incentives. Also, p olicies that are implemented in order to enhance social preferences will be more effective when incentives are little used. The second stems from Titmusss claim that if the crowding out effect is so strong that the incentive has an opposite effect than intended, incentives should be used less.However, in many cases the effectiveness of incentives is not reversed, but blunted and then the implications for the optimal use of incentive isnt that self-evident (Bowles & Hwang, 2008). How Bowles & Hwang (2008) state it the reduced effectiveness of the incentive associated with crowding out would entail a larger incentive for a planner designing a subsidy to ensure compliance with a quantitative target (p. 4). Present evidence is insufficient in providing enough guidelines to the policy maker who wants to know ex bet on what the effects are of the incentives that he considers to implement (Bowles & Polania-Reyes, 2012).What we do know is that the same incentives imposed by indiv iduals who have no personal benefit but only want to promote pro-social behavior (as in the experiment of Fehr & Gachter, 2000) are more likely to increase contributions than when imposed by an untrusting principal (Fehr & Rockenbach, 2003). Furthermore it seems to be important to let the agent understand that the desired change in behavior would be socially beneficial rather than that the incentive is perceived as a threat to her autonomy or reflecting badly on the designers intentions (Bowles & Polania-Reyes, 2012). ConclusionThe self-interest hypothesis assumes that individuals are only motivated by their own material self-interest. This assumption is used in the design of many policies. However, in the past decades a lot of experiments have shown that other-regarding social preferences rather than self-regarding preferences play a role in behavior. We have seen that some mechanisms can induce pro-socially oriented individuals to make as they are selfish. On the other h and, there are also examples of experiments in which mechanisms induce self-interested individuals to behave at a more pro-social level.Thus, incentives can lead to both crowding out and crowding in phenomena. Whereas negative information about the principal and the over-justification effect may lead to crowding out of intrinsic motivation to add up to a good, altruistic punishment by peers who do not benefit in person is more likely to increase contributions. Furthermore it seems important to make individuals aware of their polite duty, as was shown in Ireland where a small tax was imposed on plastic bags.Regarding to public policy, we have seen that small differences in institutional design can lead to many different outcomes. This imposes a big challenge on the policy designer who has to know ex ante what the effects of the incentive that he is considering to implement will be. When social preferences are not present, incentives may have a positive effect, predicted by economic theory. However, in areas where social preferences do play a role, the use of monetary incentives needs to be reconsidered.