IDEAS home Printed from https://ideas.repec.org/p/ums/papers/2008-06.html
   My bibliography  Save this paper

Social Preferences and Public Economics: Mechanism design when social preferences depend on incentives

Author

Listed:
  • Samuel Bowles

    (Santa Fe Institute, University of Siena and University of Massachusetts)

  • Sung Ha Hwang

    (University of Massachusetts, Amherst)

Abstract

Social preferences such as altruism, reciprocity, intrinsic motivation and a desire to uphold ethical norms are essential to good government, often facilitating socially desirable allocations that would be unattainable by incentives that appeal solely to self-interest. But experimental and other evidence indicates that conventional economic incentives and social preferences may be either complements or substitutes, explicit incentives crowding in or crowding out social preferences. We investigate the design of optimal incentives to contribute to a public good under these conditions. We identify cases in which a sophisticated planner cognizant of these non-additive effects would make either more or less use of explicit incentives, by comparison to a naive planner who assumes they are absent. JEL Categories: D52, D64, H21. H41

Suggested Citation

  • Samuel Bowles & Sung Ha Hwang, 2008. "Social Preferences and Public Economics: Mechanism design when social preferences depend on incentives," UMASS Amherst Economics Working Papers 2008-06, University of Massachusetts Amherst, Department of Economics.
  • Handle: RePEc:ums:papers:2008-06
    as

    Download full text from publisher

    File URL: http://www.umass.edu/economics/publications/2008-06.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
    2. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
    3. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough or Don't Pay at All," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 791-810.
    4. Cardenas, Juan Camilo & Stranlund, John & Willis, Cleve, 2000. "Local Environmental Control and Institutional Crowding-Out," World Development, Elsevier, vol. 28(10), pages 1719-1733, October.
    5. Cooter, Robert, 1998. "Expressive Law and Economics," The Journal of Legal Studies, University of Chicago Press, vol. 27(2), pages 585-608, June.
    6. Jean Tirole & Roland Bénabou, 2006. "Incentives and Prosocial Behavior," American Economic Review, American Economic Association, vol. 96(5), pages 1652-1678, December.
    7. Fischbacher, Urs & Fong, Christina M. & Fehr, Ernst, 2009. "Fairness, errors and the power of competition," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 527-545, October.
    8. Hirschman, Albert O., 1985. "Against Parsimony: Three Easy Ways of Complicating some Categories of Economic Discourse," Economics and Philosophy, Cambridge University Press, vol. 1(1), pages 7-21, April.
    9. Rodriguez-Sickert, Carlos & Guzmán, Ricardo Andrés & Cárdenas, Juan Camilo, 2008. "Institutions influence preferences: Evidence from a common pool resource experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 215-227, July.
    10. Seabright, Paul, 2004. "Continuous Preferences Can Cause Discontinuous Choices : an Application to the Impact of Incentives on Altruism," IDEI Working Papers 257, Institut d'Économie Industrielle (IDEI), Toulouse.
    11. Ernst Fehr & Alexander Klein & Klaus M Schmidt, 2007. "Fairness and Contract Design," Econometrica, Econometric Society, vol. 75(1), pages 121-154, January.
    12. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    13. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    14. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," Review of Economic Studies, Oxford University Press, vol. 24(1), pages 11-32.
    15. Pommerehne, Werner W & Weck-Hannemann, Hannelore, 1996. "Tax Rates, Tax Administration and Income Tax Evasion in Switzerland," Public Choice, Springer, vol. 88(1-2), pages 161-170, July.
    16. Ernst Fehr & Bettina Rockenbach, 2003. "Detrimental effects of sanctions on human altruism," Nature, Nature, vol. 422(6928), pages 137-140, March.
    17. Ernst Fehr & John A. List, 2004. "The Hidden Costs and Returns of Incentives-Trust and Trustworthiness Among CEOs," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 743-771, September.
    18. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
    19. Jean-Jacques Laffont & Mohamed Salah Matoussi, 1995. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 381-399.
    20. Cooter, Robert, 1998. "Expressive Law and Economics," Berkeley Olin Program in Law & Economics, Working Paper Series qt3w34j60j, Berkeley Olin Program in Law & Economics.
    21. Josef Falkinger, 2000. "A Simple Mechanism for the Efficient Provision of Public Goods: Experimental Evidence," American Economic Review, American Economic Association, vol. 90(1), pages 247-264, March.
    22. Irlenbusch, Bernd & Sliwka, Dirk, 2005. "Incentives, Decision Frames, and Motivation Crowding Out – An Experimental Investigation," IZA Discussion Papers 1758, Institute of Labor Economics (IZA).
    23. Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-364, May.
    24. Simon Gachter & Ernst Fehr, 2000. "Cooperation and Punishment in Public Goods Experiments," American Economic Review, American Economic Association, vol. 90(4), pages 980-994, September.
    25. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
    26. Bruno S. Frey, 1994. "How Intrinsic Motivation is Crowded out and in," Rationality and Society, , vol. 6(3), pages 334-352, July.
    27. Robert Cooter, 1998. "Expressive Law and Economics," CESifo Working Paper Series 161, CESifo.
    28. Bohnet, Iris & Frey, Bruno S. & Huck, Steffen, 2001. "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," American Political Science Review, Cambridge University Press, vol. 95(1), pages 131-144, March.
    29. Bruno S. Frey & Reto Jegen, 2001. "Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
    30. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
    31. Frey, Bruno S, 1997. "A Constitution for Knaves Crowds Out Civic Virtues," Economic Journal, Royal Economic Society, vol. 107(443), pages 1043-1053, July.
    32. Michael Kosfeld & Armin Falk, 2006. "The Hidden Costs of Control," American Economic Review, American Economic Association, vol. 96(5), pages 1611-1630, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Samuel Bowles & Sandra Polania-Reyes, 2011. "Economic incentives and social preferences: substitutes or complements?," Department of Economics University of Siena 617, Department of Economics, University of Siena.
    2. Samuel Bowles & Sandra Polanía Reyes, 2009. "Economic Incentives and Social Preferences: A Preference-based Lucas Critique of Public Policy," CESifo Working Paper Series 2734, CESifo.
    3. Samuel Bowles & Sandra Polanía Reyes, 2009. "Economic Incentives and Social Preferences: A preference-Based Lucas Critique of Public Policy," UMASS Amherst Economics Working Papers 2009-11, University of Massachusetts Amherst, Department of Economics.
    4. S. Bowles & S. Polania-Reyes., 2013. "Economic Incentives and Social Preferences: Substitutes or Complements?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
    5. Xiao, Erte & Houser, Daniel, 2011. "Punish in public," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 1006-1017, August.
    6. Dickinson, David & Villeval, Marie-Claire, 2008. "Does monitoring decrease work effort?: The complementarity between agency and crowding-out theories," Games and Economic Behavior, Elsevier, vol. 63(1), pages 56-76, May.
    7. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    8. Rigdon, Mary, 2009. "Trust and reciprocity in incentive contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 93-105, May.
    9. Claudia Keser & Andreas Markstädter & Martin Schmidt, 2014. "Mandatory minimum contributions, heterogeneous endowments and voluntary public-good provision," CIRANO Working Papers 2014s-47, CIRANO.
    10. Uri Gneezy, 2003. "The W effect of incentives," Levine's Bibliography 666156000000000315, UCLA Department of Economics.
    11. Kajackaite, Agne & Werner, Peter, 2015. "The incentive effects of performance requirements – A real effort experiment," Journal of Economic Psychology, Elsevier, vol. 49(C), pages 84-94.
    12. Ernst Fehr & Klaus M. Schmidt, 2007. "Adding a Stick to the Carrot? The Interaction of Bonuses and Fines," American Economic Review, American Economic Association, vol. 97(2), pages 177-181, May.
    13. Irlenbusch, Bernd & Ruchala, Gabriele K., 2008. "Relative rewards within team-based compensation," Labour Economics, Elsevier, vol. 15(2), pages 141-167, April.
    14. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, vol. 97(3), pages 999-1012, June.
    15. Timo Goeschl & Grischa Perino, 2012. "Instrument Choice and Motivation: Evidence from a Climate Change Experiment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 52(2), pages 195-212, June.
    16. Carl Mellström & Magnus Johannesson, 2008. "Crowding Out in Blood Donation: Was Titmuss Right?," Journal of the European Economic Association, MIT Press, vol. 6(4), pages 845-863, June.
    17. Simon Gaechter & Esther Kessler & Manfred Koenigstein, 2011. "The roles of incentives and voluntary cooperation for contractual compliance," Discussion Papers 2011-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    18. Xiao, Erte, 2013. "Profit-seeking punishment corrupts norm obedience," Games and Economic Behavior, Elsevier, vol. 77(1), pages 321-344.
    19. Galbiati, Roberto & Vertova, Pietro, 2014. "How laws affect behavior: Obligations, incentives and cooperative behavior," International Review of Law and Economics, Elsevier, vol. 38(C), pages 48-57.
    20. Keser, Claudia & Markstädter, Andreas & Schmidt, Martin, 2014. "Mandatory minimum contributions, heterogenous endowments and voluntary public-good provision," University of Göttingen Working Papers in Economics 224, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    Social preferences; implementation theory; incentive contracts; incomplete contracts; framing; motivational crowding out; ethical norms; constitutions;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ums:papers:2008-06. 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: . General contact details of provider: https://edirc.repec.org/data/deumaus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Daniele Girardi (email available below). General contact details of provider: https://edirc.repec.org/data/deumaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.