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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 Research Institute for Market Economy, Sogang University

Abstract: In both experimental and natural settings incentives sometimes under-perform, generating smaller e ects on the targeted behaviors than would be predicted for entirely self-regarding agents. A parsimonious explanation is that incentives that appeal to payo maximizing mo- tives 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 e ects. Evidence from behavioral experiments indicates that crowding may take two forms: categorical (the e ect on preferences depends only on the presence or absence of the incentive) or marginal (the e ect 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 e ects 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: D64 H41 D78 D03 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-evo and nep-exp
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:1118

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