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Behavioral Economics

Crowding Out Virtue

Imposing a fine on those violating a social norm destroyed the norm.

The main message of Richard Titmuss’ influential The Gift Relationship: From Human Blood to Social Policy (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 preexisting values that would otherwise lead people to act in generous or civic-minded ways.

The debate on incentives since then has polarized the social science disciplines. A quick way of counting the economists at a dinner party is to ask for a show of hands of those objecting to Titmuss’ conclusion. But in recent years this once unerring “economist detector” would net quite a few from other disciplines, too, who are avidly proposing monetary incentives for everything from losing weight to reading books.

The good news is that you would now miss a few economists, who have discovered that incentives sometimes backfire, both in practice and in the experimental lab. This is not news to psychologists, who were doing experiments showing something similar at the time Titmuss published his book.

What is news is that economists are now contributing to this literature, with experimental techniques derived from game theory and incentives based on real money. I review dozens of cases in my book The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens.

Here is an example of an incentive that induced almost entirely selfish behavior in people who, without the incentive, had previously acted quite unselfishly. Juan Camilo Cardenas, a Colombian behavioral economist, and his University of Massachusetts co-authors ran an experimental game that is very similar to the real-world commons problem faced by his subjects—users of the rural Colombian ecosystem.

In the experiment, Cardenas let the villagers choose how many “months” they would spend extracting resources from the hypothetical forest. There was a level of exploitation of the forest (one month per year) that, if practiced by all, would maximize the total payoffs to the group. However, each individual would do better by extracting much more than this “social optimum.” The game was similar in this respect to the Prisoner’s Dilemma.

The villagers immediately recognized the analogy between the experimental game, with its hypothetical forest, and their everyday challenges of making a livelihood from the real forest. There was nothing hypothetical about their payoffs in the experiment; they would earn substantial sums of money if they managed to cooperate. They could also take home a bundle if they figured out a way to free ride on their cooperative neighbors.

In the first stage of the experiment, lasting seven rounds, the villagers on average, extracted 44 percent less of the experimental “resource” than the social optimum. The villagers, it seemed were pretty public spirited.

To measure how green they really were, Cardenas cleverly used a statistic—the difference between how much a villager extracted from the forest and the amount of extraction that would have given the villager the greatest material payoff. This is a measure of each individual’s social preferences, that is, their willingness to forgo individual gain for a common social benefit. By this measure the villagers on the average were giving up substantial sums to protect the forest.

For the remaining rounds of the game, Cardenas explained that they would have to pay a small fine (imposed by the experimenter) if they were found to be extracting more from the forest than the social optimum. Of course Cardenas knew how much each was extracting, but the fine would be imposed only if they were “monitored” which would occur with a probability known to the villagers.

He was curious about the effect of the incentive—the threat of the fine—on the villagers’ social preferences. He would measure this by how much they deviated from what an entirely selfish person would do once the possibility of being fined for over extraction was introduced.

What he found out was a shocker.

As expected, villagers initially extracted much less than before, showing that the threat of the penalty had the intended effect. But as the experiment progressed, they began to extract more.

By the end of the game, the villagers’ levels of extraction were barely (and not statistically significantly) less than what an entirely self-interested person would extract. Remember: These are the very same villagers who in stage one, without incentives, extracted only a little more than half of what would have maximized their personal gain.

An economist would say that the incentive worked. But it almost entirely sidelined whatever motives had initially led the villagers, in the absence of the incentive, to forgo substantial individual gain by limiting their extraction levels for the benefit of the group.

The fine worked as a substitute for the villagers’ preexisting ethical motives rather than an additional reason to preserve the forest. The whole, in this case, was less than the sum of its parts. A mathematician would say that the fine and the villagers ethical motives were subadditive.

Based on his study of blood donations, Titmuss had concluded that incentives were over-used as a tool of social policy and should be downplayed. Maybe mis-used would be a more accurate conclusion.

In a future blog post I will ask how the Colombian villagers might have responded differently to the incentives, and why it might be that incentives per se are not the real culprit here.

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