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  • Writer's pictureAndrew Alam-Nist

The Issue With Incentivising Good Behaviour

In the opening pages of Steven Levitt and Stephen Dubner’s bestseller, ‘Freakonomics’, they state that ‘economics is, at root, the study of incentives.' By far the most common types of incentives proposed by economists are monetary incentives, taking a range of different forms: tax, subsidies, discounts, fines, and a range of other mechanisms. These incentives are generally implemented to encourage or discourage certain activities. (e.g. a tax on tobacco is arguably meant to discourage smoking)

Under standard economic reasoning, economic incentives are an extremely reasonable way of supporting a particular course of action. A rational self-interested consumer would be far more likely to do something if positive incentives were implemented and less likely to do something if negative incentives were implemented, in order to maximize their own utility.

This conception of incentives often holds. For actions that are primarily looked at through a monetary lens, such as corporate finance, the effect of incentives is mostly additive. Monetary incentives simply serve to add extra impetus for a particular course of action.

However, they sometimes fail to work, with occasionally detrimental side-effects. In a now-famous experiment in Israeli day-care centres, a pair of economists aimed to limit the issue of parents coming in late to pick up their children. They proposed a quite intuitive solution. Parents who fail to pick up their children on time would be fined $3 per incident. The economists tracked the number of late arrivals for 4 weeks before the fine was implemented, at which point there were 8 late pickups per week. They expected implementing their fine would cause this number to decline. This decline did not happen. Soon after the scheme’s implementation, the number of late pickups actually rose to 20 per week, more than double the previous average. After the withdrawal of the fine, the number of late pickups stayed at about 20 per week.

This goes against what economists might typically expect. Under standard economic reasoning, for a rational consumer who maximises their own utility, the effect of a fine would be to incentivise against paying. At worst, the number of parents coming in late would remain the same.

However, when considering Israeli day-cares and indeed for other immaterial goods, this is evidently not always the case. In the case of the Israeli day-cares, the monetisation of an item actively denigrated and denatured the previous spirit embodying it.

Before the application of monetary incentives, parents would look at the return of children through a primarily moral and social lens. They would pick up their children on time not because they had a monetary reason to do so but rather because they were afraid of both the social stigma and the moral culpability brought about by failing to pick up children on time.

The application of monetary incentives changed this paradigm. By putting a monetary price on morality, the parents receive a tacit message that the moral cost of failing to return on time was $3. Instead of looking at the return on time through a moral or social lens, they began to look at the return on time through a monetary, self-interested lens. They began to feel that it wins the right way to look at failing to return through this self-interested monetary lens. The feeling of moral and societal duty was displaced. Even after the fine was removed, the parents continued to return late at high rates. This represented the fundamental corrosion of the general implicit contract between parents and day-care centres.

A similar displacement of moral sensibilities has been shown to occur across a wide range of implementations of monetary incentives and disincentives. In 1993, the Swiss government needed an area to put a nuclear waste site. Due to a feeling of governmental obligation, a slim majority of the residents of the village of Wolfenschiessen, a potential receiver, said they would support it. To build up support, some regional economists proposed to pay yearly cash payments as high as $8,700 to incentivise them to take it. The support for receipt of a nuclear site halved. There was no longer felt to be a community obligation to receive a nuclear waste site. This is, above all, because it changed the lens through which residents viewed the receipt of the nuclear site from a moral one based upon duty to an economic self-interested paradigm. It fundamentally corroded community obligations and morality.

A study of Israeli high-school students collecting donations provides similar evidence. On a day in which students were collecting donations for ‘worthy causes’, (cancer research, aid for disabled children etc…) economists classed students into 3 categories. The first would pass all the earnings they collected to charity, the second would be able to take a 1% cut, and the third a 10% cut. Under standard economic reasoning, the third group would collect more than the second who would themselves collect more than the first. In truth, whilst the third group did collect more than the second group, the first collected more than either (55% more than the second and 9% more than the third). This is primarily because the two latter groups were motivated by a monetary paradigm, whilst the first, without any pretence of gain, was working solely for charitable reasons and had a moral enthusiasm and virtue. The monetary paradigm of self-interest once again displaced and reduced the importance of the moral feeling of duty.

In all the examples above, economic incentives displace feelings of moral obligation and fundamentally change how a community or individual thinks about a certain action. Economists often assume items remain inert when economic incentives are applied, however for matters of moral obligation or virtue this is very much a questionable claim.

The displacement of virtue accompanying monetary incentives provide two issues. Firstly, incentives are often ineffective. Considering how an incentive generally have a direct cost or significant opportunity cost, this warrants a search into other potentially more effective solutions.

However, perhaps the more profound issue is that economising of areas typically governed by virtue can corrode and displace the moral sensibilities which previously governed them. The sacrifice of virtue is itself extremely harmful, on a moral level. For Aristotle, it is the responsibility of governments and institutions of power to cultivate virtue within citizens so that they can live the good life. By contrast, monetary incentives often, instead of cultivating virtue, denature and denigrate it.

This does not make monetary incentives universally bad for moral matters. Their negative effect may be very limited or in some cases non-existent. Moreover, the positive effects of incentivisation might be deemed to outweigh the harms of their loss in virtue. For instance, whilst we may prefer for corporations to act out of moral obligation to decarbonise, monetary incentives and disincentives are probably more realistic as a means for decarbonising the world. However, what it does mean is that economists when thinking of applying monetary incentives to typically moral issues must make a value judgement between potential benefits and the loss of virtue which economic incentives can cause. This is something that often makes economists uncomfortable. Economics is a discipline that often considers itself to rise above the fray of morality. This should change when considering economic incentives and disincentives.

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