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A note on optimal incentives with state-dependent preferences

Author

Listed:
  • Sung-Ha Hwang

    () (Department of Economics, Sogang University, Seoul)

  • Samuel Bowles

    () (Santa Fe Institute, U.S.A. and Dipartimento di Economia Politica, Univerity of Siena, Italy)

Abstract

In both experimental and natural settings incentives sometimes under-perform, generating smaller e ects on the targeted behaviors than would be predicted for entirely self-regarding agents. A parsimonious explanation is that incentives that appeal to payo maximizing mo- tives 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 e ects. Evidence from behavioral experiments indicates that crowding may take two forms: categorical (the e ect on preferences depends only on the presence or absence of the incentive) or marginal (the e ect 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 e ects 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.

Suggested Citation

  • Sung-Ha Hwang & Samuel Bowles, 2011. "A note on optimal incentives with state-dependent preferences," Working Papers 1118, Research Institute for Market Economy, Sogang University.
  • Handle: RePEc:sgo:wpaper:1118
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    File URL: ftp://163.239.156.99/wpaper/HSH_RIME_2011-18.pdf
    File Function: First version, 2011
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    Cited by:

    1. S. Bowles & S. Polania-Reyes., 2013. "Economic Incentives and Social Preferences: Substitutes or Complements?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.

    More about this item

    Keywords

    Social preferences; public goods; motivational crowding out; explicit incentives; framing; endogenuous preferences;

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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