Continuous Preferences Can Cause Discontinuous Choices: An Application to the Impact of Incentives on Altruism
Implementing incentive systems can sometimes backfire in practice: experimental evidence and folklore both suggest that offers of explicit rewards can expose surprising discontinuities in behaviour. This Paper models two such discontinuities that have been claimed by psychologists and experimental economists to constitute important exceptions to the standard economic theory of human motivation. The first (‘type discontinuity’) is the observation of a discontinuity in the distribution across population types of values of the willingness to accept payment in return for performing certain (‘civic’) actions, such as giving blood or performing public service. It is claimed that this distribution is bimodal, even discontinuous: many people have a zero WTA, many have a large positive WTA, but nobody has a small positive WTA. The second (‘payment discontinuity’, also known as ‘crowding-out’) is that people who are willing to perform certain actions for free will refuse to perform them for a low price, even if they subsequently agree to perform them if the price is raised enough. Civic virtue may, on this view, be crowded out by the introduction of explicit incentives; people may stop doing things they were previously prepared to do without reward. The Paper shows that both phenomena may be observed as a result of individuals’ acting in a first period of public service in the knowledge that the terms of their action signal their type, and their type will affect a process of assortative matching in a second period. Type Discontinuity, but not Payment Discontinuity, is observed in a signaling game in which individuals announce the prices at which they will perform a civic action. Payment Discontinuity, but not Type Discontinuity, is observed in a screening game in which individuals have only a binary participation decision available to signal their type. The proportion of individuals participating when rewards are zero can be higher than when rewards are positive but small.
|Date of creation:||Mar 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
- Shimer, R. & Smith, L., 1998.
"Assortive Matching and Search,"
98-09, Michigan - Center for Research on Economic & Social Theory.
- Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2a, Massachusetts Institute of Technology (MIT), Department of Economics.
- Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2b, Massachusetts Institute of Technology (MIT), Department of Economics.
- Kremer, M & Maskin, E, 1996.
"Wage Inequality and Segregation by Skill,"
96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
- Lerman, Robert I, 1996. "The Impact of the Changing US Family Structure on Child Poverty and Income Inequality," Economica, London School of Economics and Political Science, vol. 63(250), pages S119-39, Suppl..
- George J. Mailath & Larry Samuelson & Avner Shaked, .
"Endogenous Inequality in Integrated Labor Markets with Two-sided Search,"
Penn CARESS Working Papers
90ff654ed11b714e3f7530c57, Penn Economics Department.
- Larry Samuelson & George J. Mailath & Avner Shaked, 2000. "Endogenous Inequality in Integrated Labor Markets with Two-Sided Search," American Economic Review, American Economic Association, vol. 90(1), pages 46-72, March.
- George J. Mailath & Larry Samuelson & Avner Shaked, . ""Endogenous Inequality in Integrated Labor Markets with Two-sided Search''," CARESS Working Papres 98-06, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Acemoglu, D., 1996.
"Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence,"
96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
- Daron Acemoglu, 1999. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," American Economic Review, American Economic Association, vol. 89(5), pages 1259-1278, December.
- Acemoglu, Daron, 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," CEPR Discussion Papers 1459, C.E.P.R. Discussion Papers.
- Daron Acemoglu, 1998. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," NBER Working Papers 6658, National Bureau of Economic Research, Inc.
- Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-55, September.
- Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
- Dow, William H. & Philipson, Tomas, 1996. "An empirical examination of the implications of assortative matching on the incidence of HIV," Journal of Health Economics, Elsevier, vol. 15(6), pages 735-749, December.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4322. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.