A note on optimal incentives with state-dependent preferences

Sung-Ha Hwang and Samuel Bowles ()
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Samuel Bowles: Santa Fe Institute, U.S.A. and Dipartimento di Economia Politica, Univerity of Siena, Italy

No 1118, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: In both experimental and natural settings incentives sometimes under-perform, generating smaller effects on the targeted behaviors than would be predicted for entirely self-regarding agents. A parsimonious explanation is that incentives that appeal to payoff maximizing motives may crowd out non-economic motives such as altruism, reciprocity, intrinsic motivation and other social preferences, leading to disappointing and sometimes even counter-productive incentive effects. Evidence from behavioral experiments indicates that crowding may take two forms: categorical (the effect on preferences depends only on the presence or absence of the incentive) or marginal (the effect depends on the extent of the incentive). We extend an earlier contribution to this journal (Bowles and Hwang, 2008) providing a more general framework for the study of optimal incentives when crowding out results from framing and information effects including (with evidence for ) categorical crowding, and as a result, an expanded range of situations for which the sophisticated planner will make greater use of incentives when incentives crowd out social preferences than when motivational crowding is absent.

Keywords: Social preferences; public goods; motivational crowding out; explicit incentives; framing; endogenuous preferences (search for similar items in EconPapers)
JEL-codes: D03 D64 D78 H41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2011
New Economics Papers: this item is included in nep-cta, nep-evo and nep-exp
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Citations: View citations in EconPapers (1)

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