Incentives: when they work, and when they backfire

Imagine your school wants students to read more, so it pays 1 dollar for every book they finish. A month later, students have claimed the dollar for dozens of thin books, but the long novels haven’t moved. The school got more books finished. It did not get much more reading.

That dollar is an incentive: a reward or a penalty that makes a choice more or less attractive, and so can change what people do. Some incentives backfire: they make the problem they were meant to fix worse.

Key Term

Two ways to sort incentives

Incentives can be sorted two ways: positive or negative, and financial or social.

Positive incentives reward a choice: a prize, a bonus, a discount.
Negative incentives penalise a choice: a fine, a charge, a telling-off.
Financial incentives work through money.
Social incentives work through what other people think of you and through your own conscience: praise, embarrassment, guilt, a sense of duty. (Some economists call guilt and duty moral incentives instead.)

A parking fine is negative and financial. A coach praising you in front of the team is positive and social. Many incentives work both ways at once: a fine costs money, and it can embarrass you too. Social incentives can push just as hard as money.

A price is an incentive too. When bus fares go up, some riders walk or cycle instead. The step from free to a small price can matter far more than its size suggests. A charge of a few cents can make people stop and ask whether they need the thing at all.

People respond to what a rule actually rewards, not to what its designers hoped for. If a reward pays for something easy to count, such as books finished, people look for the cheapest way to push the count up. That is called gaming the incentive: collecting the reward without doing what it was meant for.

Interactive — Did the incentive work?

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Five real incentives, each with its outcome, an evidence label and a source.

Notice what the two that worked had in common. The cheapest way to avoid paying was exactly what the designers wanted: bring your own bag, or drive into the centre less. The three that backfired each left a way round the rule that the designers didn’t want. Parents paid to be late, some people in Hanoi bred rats, and Mexico City got more cars, and dirtier ones.

A reward like Hanoi’s, which ends up encouraging the very thing it was meant to stop, is called a perverse incentive.

Trap · Common Misconception

"A fine always cuts the behaviour"

Why did lateness go up at the day-care centres? The researchers gave two possible explanations and couldn’t rule out either.

Guilt: staying late was part of the teachers’ job, but parents may have seen it as a favour. Taking advantage of a favour feels wrong. The fine turned the favour into a service with a price, and a cheap one. Once parents had paid, there was nothing to feel guilty about.
Information: before the fine, parents couldn’t be sure what would happen if they came late too often, so they held back. The small fine told them the worst they faced was a small charge.

Usually, a fine or a charge does cut the behaviour, as the bag and congestion charges did. And in a 2020 survey, people asked to imagine the same day-care rule said a fine would cut their lateness. So treat the day-care result as a warning, not a law. Watch for it when a fine is small and people were behaving well out of duty or guilt.

Tip

Three questions to predict an incentive

What exactly does it reward or punish? Hanoi paid for tails, not for fewer rats.
What is the cheapest way to get the reward or dodge the penalty? If that isn’t the behaviour you want, expect people to take it.
What already drives the behaviour? If guilt or duty was doing the work, money may replace it instead of adding to it.

Check yourself · no marks

A city pays its rubbish collectors a bonus for every street they finish before noon. What might go wrong, and how could the city change the reward?

Commit to one first. Guessing and being wrong beats reading the answer cold.

Practice · 1 / 6

Wrong answers cost no XP

Put the ideas to work:

Leah’s neighbours all sort their recycling. She would feel embarrassed to be the only one on the street who doesn’t, so she sorts hers too. Is the embarrassment an incentive?

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