A note on optimal incentives with state-dependent preferences

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.