Abstract

addresses are <ugneezy@ucsd.edu>, <sm3087@columbia.edu>, and <pedro.rey@uab.cat>. 2 Economists often emphasize that "incentives matter." The basic "law of behavior" is that higher incentives will lead to more effort and higher performance: principals who are employers, for example, often use extrinsic incentives to motivate their employees. In recent years, the use of incentives in behavioral interventions has become more popular. Should students be provided with financial incentives for increased school attendance, for reading, or for better grades? Will financial incentives encourage higher contributions to public goods, like blood donations? Should programs to reduce smoking or to encourage exercise include a monetary incentive? These applications of incentives have provoked heated debate. Proponents of using incentives in behavioral interventions argue, for example, that monetary incentives can be helpful in getting people to study or exercise more. Opponents believe that using incentives in those areas could backfire, because extrinsic incentives may in some way crowd out intrinsic motivations that are important to producing the desired behavior. This paper proceeds by discussing some general aspects of how extrinsic incentives may come into conflict with other motivations. For example, monetary incentives from principals may change how tasks are perceived by agents. If incentives are not large enough, this change in perception can lead to undesired effects on behavior. In other cases, incentives might have the desired effects in the short term, but they still weaken intrinsic motivations. Thus, once the incentives are removed, people may pursue the desired outcome less eagerly. To put it in concrete terms, an incentive for a child to learn to read could achieve that goal, but then be counterproductive as an incentive for students to enjoy reading and seek it out over their lifetimes. The following sections of the paper then discusses the research literature on three important examples in which monetary incentives have been used in a non-employment context to foster the desired behavior: education, increasing contributions to public goods, and helping 3 people change their lifestyles. The conclusion sums up some lessons on when extrinsic incentives are more or less likely to alter such behaviors in the desired directions. The Potential Crowding Out Effect vs. Extrinsic Incentives 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. Several papers in recent years have shown that such crowding-out effects can be handled with fairly standard economic modeling of principal-agent problems that use non-standard assumptions. This type of model illustrates some principal channels through which incentives can affect agents' decisions about effort. One channel is information. In a private-good context without image concerns and in which the principal is better informed than the agent, the principal chooses a reward level based on several factors, including how the principal views the difficulty 4 or attractiveness to be performed, and how the principal views the intrinsic motivation or ability of the agent. For example, offering incentives for improved academic performance in schools may signal that achieving a specific goal is difficult, that the task is not attractive, or that the agent is not well-suited for it (and thus needs the additional incentive of a reward). Alternatively, offering incentives could signal that the principal does not trust the agent's intrinsic motivation. This signal will be "bad news" for the agent and can lower the intrinsic motivation of the agent to undertake the task. A second channel for crowding out appears when extrinsic incentives reduce other motives for undertaking the task. For example, if a higher personal benefit associated with a certain level of prosocial behavior affects the reputational value attributed to a person's intrinsic and extrinsic motivation. That is, decreasing the signal about social preferences and increasing the signal about a person's greediness may result in lower image motivation. In such cases, offering higher material rewards may backfire if the effect on image motivation is stronger than the standard price effect. This effect may depend on the extent to which these signals are public. These channels illustrate some basic properties of behavioral effects of incentives and create implications for the design of incentives. Crowding Out in the Short Run When Incentives Are In Place The psychology literature contains many examples of incentives that reduce effort or motivation to undertake a task during the short-run when such incentives are in place. Early attempts to understand what motivates people tended to focus on two areas: 1) basic biological needs of survival and procreation, and 2) extrinsic rewards or punishment. However, in the early 1970s, psychologists began exploring the nature of intrinsic and extrinsic motivation, particularly 5 the assumption that intrinsic motivation always pushes behavior in the same direction as extrinsic motivation (see the survey of this literature in A general theme of this work was that incentives contain information relayed from the principal to the agent, and such information can provoke unexpected effects on behavior. For example, Frey and Oberholzer-Gee (1997) show that offering members of a community a large monetary compensation for a nuclear waste site's presence, the principal signals that the risks involved are high, and thus community members may be less willing to accept the plant. Agents will draw inferences from both the existence and size of the offered incentives. The definition of what constitutes "small" and "large" incentives depends on the case, but the message seems to be clear; as Gneezy and Rustichini's (2000a) title suggests, "Pay enoughor don't pay at all." In one of their experiments, Gneezy and Rustichini (2000a) present field evidence that high school students who collected donations for a charity in a door-to-door fund raising campaign, invested more effort when they were not compensated for it than when a small compensation was offered to them. Once compensation for effort was offered, higher payment resulted in higher effort. For most tasks, if incentives are large enough, their direct price effect will be larger than the crowding-out effect in the short run. 1 However, incentives can backfire even in the short run in many situations. Crowding out After Incentives Are Removed 1 Interesting exemptions are when incentives are so high that people may "choke under pressure" (Ariely et al, 2009). 6 If incentives signal some form of "bad news," agents who receive incentives will update their beliefs about the task, their own type, or their assessment of their principal. As a result, their motivation to perform the task without the additional incentive can be reduced permanently. Because the standard incentive effect is gone in the long run (we define the long run as after the incentives are removed), effort will be lower than it was before extrinsic incentives were offered. In educational settings, negative long-run effects on students' joy of learning might be especially troublesome, as incentive programs are often only temporary and are restricted to certain tests/tasks. In providing incentives for changing people's lifestyle choices or for encouraging people to contribute to public goods, negative long-run effects on (intrinsic) motivation are especially problematic. For example, Meier (2007a) shows in a field experiment that although a matching incentive (25% or 50% match rate) increases donations in the short run, donations decrease below the pre-incentive period in the long run. The net effect over time of providing the matching incentive is even negative. Gneezy and Rustichini (2000b) provide an example in which behavior is not just a function of the current incentives, but may be affected by the incentives offered in previous periods. In their experiment, a daycare began charging late-coming parents a small fine of 10 New Israeli shekels (about $3 at the time). The result was an increase in the number of late pickups even in the short run, that is, while the incentives were present. One interpretation of this result is information: the parents did not initially know how important it was to arrive on time. The contract specified that they should pick their children up on time but failed to specify the penalty if they did not. The distribution of the parents' beliefs regarding how bad it was to be late may have included bad scenarios (for example, "the teacher will make my child suffer"). Once a small fine was imposed, the contract was complete in that being late was priced. The relatively 7 small fine signaled to parents that arriving late was not that important. This new piece of information that it was not so bad to be late did not disappear once the fine was removed. Indeed, This crowding-out discussion does not, of course, mean that using incentives to obtain behavioral changes will always be counterproductive. Sometimes it is enough that the incentives work in the short run. Even in the long run, sometimes incentives will foster good habits. Incentives in Education It may seem that designing incentive mechanisms to improve education should be relatively straightforward. Students may invest too little effort in their own education because they overly discount the future, have time-inconsistent preferences, or underestimate the return on education. Extrinsic incentives can then provide immediate returns that provide an extra 8 motivation to study. Similarly, incentives can give parents and teachers additional reasons to put