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Psychological Foundations of Incentives

  • Fehr, Ernst

    ()

    (University of Zurich)

  • Falk, Armin

    ()

    (University of Bonn)

During the last two decades economists have made much progress in understanding incentives, contracts and organisations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 507.

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Length: 55 pages
Date of creation: May 2002
Publication status: published in: European Economic Review, 2002, 46 (4-5), 687-724
Handle: RePEc:iza:izadps:dp507
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