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A note on optimal incentives with state-dependent preferences

  • 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)

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.

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Paper provided by Research Institute for Market Economy, Sogang University in its series Working Papers with number 1118.

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Length: 20 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:sgo:wpaper:1118
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