Moral sentiments and material interests: When economic incentives crowd in social preferences

Samuel Bowles 26 May 2016

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The main message of Richard Titmuss’ influential The Gift Relationship: From Human Blood to Social Policy (Titmuss 1971) was this:  the use of economic incentives to advance social objectives may be counterproductive. The reason, he suggested, is that fines, bonuses, or other incentives induce people to adopt a ‘market mentality’, compromising pre-existing values that would otherwise lead people to act in generous or civic minded ways.

Remarkably, both Kenneth Arrow and Robert Solow took the idea seriously enough to review the book (Solow 1971, Arrow 1972).  To Arrow it was ‘really an empirical question’; and he was far from persuaded. We have learned a lot since Titmuss about how incentives work and when they do not.

Here is a much-cited example (Gneezy and Rustichini 2000). In Haifa, at six day care centres, a fine was imposed on parents who were late in picking up their children at the end of the day.

 It did not work. Parents responded to the fine by doubling the fraction of time they arrived late. After 12 weeks, the fine was revoked, but the parents’ enhanced tardiness persisted.

‘Crowding out’ is the usual explanation: the fine transformed picking up your child late and inconveniencing the staff from something that was ethically dubious to something that you could simply buy. Lateness became a marketable commodity.

The experiment has already become the poster child of those wishing to limit the role of incentives in social policy. And with good reason. The crowding out result is far from exceptional, and is observed in over 40 laboratory and field experiments by economists over the last two decades (Bowles 2016, Bowles and Polania-Reyes 2012).

Crowding out occurs also in natural settings. In Norway, for example, to reduce the turnaround time for patients, fines were imposed on managers whose hospital failed to meet standards. The incentive backfired: hospital stays lengthened. In England a different approach worked: hospital stays were greatly reduced by a policy designed to evoke shame and pride in hospital managers rather than to rely on the calculus of profit and loss (Holmas et al. 2010,  Besley et al. 2009).

But are incentives per se the culprit when crowding out occurs, or is something else at work? On this score, economics – and especially mechanism design – has a lot to learn from Greece at the time of Aristotle.  Here is how incentives might be designed to crowd in ethical motives.

When the Athenian citizens’ assembly decided in 325 BCE to set up a colony and naval station in the Adriatic, far to the west of Greece, they took on an enormous project requiring thousands of people and 289 ships (Christ 1990, Ober 2008). Neither the personnel nor the ships were at the moment under public orders; the settlers, oarsmen, navigators, and soldiers would have to be recruited from their private lives, and the ships outfitted for the mission (some would carry horses, since cavalry were involved). Ship commanders and equippers appointed from among Athens’s wealthy were required to bring a fully outfitted ship to the docks at Piraeus by a given date.

Those who felt unjustly burdened could appeal their assignment. They would do this by challenging some other (also presumably wealthy) individual to either take on their assigned tasks, or else to exchange with the challenger all their real and personal property holdings. If the target of the challenge refused to do either, then a popular jury would determine which man’s estate was the larger and should therefore bear the costs of the assignment.

The assembly would honour the “first to bring his ship [to Piraeus] with a crown of 500 drachmas and the second with a crown of 300 and the third with a crown of 200”, adding that “the herald of the Council is to announce the crowns at the … Thargelia [festival] . . . in order that the competitive zeal . . . of [the winner] towards the demos may be evident”. The daily wage for a skilled worker at the time was about one drachma, so these were substantial rewards, even though they represented a tiny fraction of the total cost of an assignment.

Lest there be any doubt about the elevated purpose served by these incentives, the decree spelled out the expected benefits of the Adriatic naval base: “the demos may for all future time have its own commerce and transport in grain” as well as protection from Etruscan pirates.

And for those unmoved by honours and rewards, there was a warning: “But if anyone to whom each of these things has been commanded does not do them in accordance with this decree, whether he be a magistrate or a private individual, the man that does not do so is to be fined 10,000 dr[achma]s”, with the proceeds going to honour Athena.

Aristotle, who died three years after the Adriatic mission began, had written “Legislators make the citizens good by inculcating habits in them...It is in this that a good constitution differs from a bad one.” The Athenian assembly had evidently taken this message to heart and adopted a system of incentives and constraints designed to cultivate civic virtue, not to compensate for its absence. 

  • Payments were prizes not bribes, designed to honour not manipulate their targets;
  • The assembly made clear that the incentives advanced an elevated public purpose, not the private gain of any particular actor; and
  • A citizen’s right to challenge his assignment made the process inclusive and mitigated any unfairness that might arise in the application of the incentives.

Now imagine that the Athenians had travelled to Haifa in a time machine and had been asked to help design the day care centres’ policy for dealing with late parents. They would not have been impressed by the sign that the day care centres had posted on their doors: “Since some parents have been coming late we (with the approval of the Authority for Private Day Care Centers in Israel) have decided to impose a fine on parents who come late to pick up their children. As of next Sunday a fine of NIS 10 [about $3 at the time, in Israeli new shekels] will be charged every time a child is collected after 16.10.”

Athenians: “Come on, Haifa! You can do better than that. How about: ‘The Council of Parents wishes to thank you for arriving on time to pick up your children, since this reduces the anxiety that the children sometimes feel and allows our staff to leave in a timely manner to be with their own families. We will recognize all parents who have a perfect record unblemished by lateness with an award of NIS 500, to be given at our annual parents and staff holiday party, with an option to contribute your award to the Teacher of the Year celebration.’”

 “But don’t stop there: ‘Those who arrive more than ten minutes late, however, will pay a fine of NIS 1,000, with the payment of the fine publicly transmitted also at the holiday party. In the unlikely event that the occasion for such a fine arises, the payment will also support the Teacher of the Year celebration.’”

Would this Athenian version of the experiment have reversed the crowding out?

It might have – and we can do better than speculate.

The tax on plastic grocery bags enacted in Ireland in 2002 resembles the fine for lateness at the Haifa day care centres: it slightly raised the cost of an action that the incentive sought to deter (Rosenthal 2008). But its effect could not have been more different: in just two weeks following its introduction, the use of the plastic bags dropped by 94%. The tax may have enhanced rather than diminished ethical motives – for many, carrying a plastic grocery bag home appeared to have joined wearing a fur coat in the closet of antisocial practices.

What is the take-home lesson from the Ireland-Haifa contrast? Unlike the Haifa fine, the Irish plastic bag tax was introduced with a clear moral purpose. It was preceded by extended public deliberation and a substantial publicity campaign dramatising discarded bags as a blight on the environment. In Haifa, the fine seems to have said, “Lateness is okay as long as you pay for it,” while in Ireland the message was “Don’t trash the Emerald Isle!”

Jeremy Bentham, in his Introduction to the Principles of Morals and Legislation (1789), advanced the idea that punishments should be “moral lessons”. The plastic bag tax was a moral lesson; the lateness fine was not. The same logic applies of course to positive incentives like subsidies and pay for performance, which unless framed as the Athenians did, may seem more like bribes than prizes.

Bentham and the Athenians understood that the ways that material interests and moral sentiments affect our behaviour are not necessarily additive – appeals to self interest and to our better nature can be either complements (crowding in) or substitutes (crowding out).

References

Arrow, K. J. (1972), "Gifts and Exchanges", Philosophy and Public Affairs 1(4): 343-62.

Besley, T., G. Bevan and K. Burchardi (2009), "Accountability and Incentives: The Impacts of Different Regimes on Hospital Waiting Times in England and Wales", LSE.

Bowles, S. (2016), The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens, New Haven: Yale University Press.

Bowles, S. and S. Polania-Reyes (2012), "Economic Incentives and Social Preferences:  Substitutes or Complements?", Journal of Economic Literature 50(2): 368-425.

Christ, M. (1990), "Liturgy Avoidance and Antidosis in Classical Athens", Transactions of the American Philosophical Association 10: 147-69.

Gneezy, U. and A. Rustichini (2000), "Pay Enough or Don't Pay at All", Quarterly Journal of Economics 115(2): 791-810.

Holmas, T. H., E. Kjerstad, H. Luras and O. R. Straume (2010), "Does Monetary Punishment Crowd out Pro-Social Motivation? A Natural Experiment on Hospital Length of Stay", Journal of Economic Behavior & Organization 75(2): 261-267.

Ober, J. (2008), Democracy and Knowledge: Innovation and Learning in Classical Athens, Princeton: Princeton University Press.

Rosenthal, E. (2008), "Motivated by a Tax, Irish Spurn Plastic Bags," New York Times, 2 February.

Solow, R. (1971), "Blood and Thunder", Yale Law Journal 80(8): 1696-711.

Titmuss, R. M. (1971), The Gift Relationship: From Human Blood to Social Policy, New York: Pantheon Books

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Topics:  Economic history Frontiers of economic research

Tags:  incentives, crowding in, fines, rewards, behaviour, crowing out

Research Professor and Director of the Behavioral Sciences Program, Santa Fe Institute

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