Behavioral Economics: Crowding Effect on motivation

Evidence of the crowding-out of intrinsic motivation

by extrinsic rewards

Why do people engage in pro-social actions? (Kits et al, 2014)

Altruism & prosocial behavior

Why do people engage in prosocial actions? (Kis et al, 2014)

Warneken & Tomasello (2008)

The influence of rewards on children’s helping

Test phase

Warm-up

same conditions but no reward nor praise;

The children subjects were exposed to a toy proven to be an effective reward in previous experiments with children.

Results

• Theories of commitment: altruism & the right thing to do;

• Compliance to social norms: deriving utility from aligning to the norms;

• Theories of fairness & reciprocity: responding to others’ ‘kind’ actions;

2007

2001

2013

children in the material reward condition help considerably less in the second phase;

Children in the praise and no reward treatments helped equally often;

Treatment phase

children were placed in a room with an adult who kept dropping objects on the floor

Three treatments:

- Material reward (toy);

- Praise ;

- No reward

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Crowding-out effect & charity

Volunteering

• The voluntary Labour market

• Blood donation

Damiano (2011):

Study of the role of monetary rewards in crowding-out intrinsic motivation in regular volunteering labour supply.

Initial study - Titmuss (1970) : Study of blood donation (pro-social action.)

Mellström & Johannesson (2008) :

A monetary reward cause a crowding-out effect

Difficult to signal altruism

A charitable option counteracts the crowding-out effect.

Increase donation, crowds-in

3 treatment conditions :

No payment / SEK 50 payment / SEK 50 payment with the option to give it to charity.

Gender differences: Crowding-out effect for women, reducing by almost 50% blood donors.

• Frey & Regen (2001): individuals perceive the reward as supportive, so it enlarges self-esteem and self-determination.

• Variables tested: Key factors for volunteer efforts - time spent in volunteering, the degree of volunteer motivation & the effect of monetary incentives

• 3 groups: intrinsically motivated / only monetary rewarded / Intrinsic + extrinsic = “Overall effect”

• Findings:

Volunteers with "overall effect" supply more hours than those who are only intrinsically motivated.

.

no crowding-out effect but "in"

• Private/public charity

Ariely et al. (2009) :

More effective rewards in private, rather than public for a prosocial activity.

Extrinsic motivations dilute the signal of the prosocial act,

the image value suffers and the incentive gets less effective.

Gneezy & Rustichini (2000):

Study of the crowding-out effect in volunteer work performance through monetary compensation

• A small payment is worse than no payment at all for a contract (Hidden cost/ unsatisfactory contract)

Services :

“Once a commodity, always a commodity”

Gneezy and Rustichini (2000) : The cost of putting a price on a social service

• A field experiment conducted in a day-care center.

• Introduction of penalties (Fine) into an incomplete contract (teachers/parents)

• No fine => low level of late arrivals
• Introducing a fine => the number of delays increase
• Fine was removed => not change in behaviours.

• Introducing a price had a real cost, with effects on behaviour.

The crowding out effect requires :

• Assymetry of information
• Sorting condition of rewards

(Bénabou & Tirole, 2003)

"Rewards are a positive reinforcer in the short term (in terms of frequency) but always decrease future motivation."

the introduction of rewards does not necessarily imply a decrease in the intrinsic motivation (agents only have incentives to hide it);

“playing hard to get” effect occurs only when the “supplier” is difficult to replace – inelastic demand;

The "Market" Frame (Schnedler and Vanberg, 2014)

The issue here is how confident the Principal is in the Agent’s intrinsic motivation.

Principal-Agent model & Psychology literature

A Principal who has bad news about the agent’s parameter BETA will fear the Agent is not motivated enough.

Signaling as an alternative explanation for crowding out effects;

The existence of rewards suggests a possible unpleasant and costly nature of the actions;

Individuals play hard to get when their activity becomes tradeable – maximize their payoff and boost the exchange value of their actions;

The Strenght of monitoring directly affects e

Dickinson and Villevale (2008)

Recent experiments & Applications

the Agent will shape his self-concepts based on his understanding of how the Principal perceives him.

Confidence-Management motive : Trust effect

2 factors increase the perception of rewards as monitoring :

• the object of the Agent's intrinsic motivation is also the source of his extrinsic compensation
• incentives received by the Agent are too large

James (2005)

2 players game with an Agent and a Principal

He would then provide strong incentives that will at least partially reveal BETA. Therefore, extrinsic motivation may “crowd-out” intrinsic motivation.

Agent select e, the level of effort to perform a task

The Looking-Glass-Self mechanism (Cooley, 1902)

Principal know a parameter BETA that affects the Agent's payoff from e (the level of effort)

The Agent do not know BETA

(Effects of rewards)

Crowding-out in politics:

an incentive to vote

He catch a signal SIGMA that is informative about BETA (more or less precised)

Presentation of the Principal-Agent paradigm

Panagopoulos (2013)

Investigated monetary incentives on voters’ turnout

2 field experiments

Design: a simple blandishment only / in addition, a financial reward ($2, $10, or $25) + control group (no mailing.)

Results: High rewards generated no crowding-out effect, resulting in higher turnout until a certain threshold (amount).

(Gerber and Green, 2000; 2008) : A $50 incentive to vote would apparently be no more effective than knocking on someone’s door.

Public interest: to incite people to vote for elections

Thus, Agent try to infer BETA from the policy p selected by the Principal to chose e*

Principal then select a policy p before the Agent's choice of action

Kits et al (2014): study on conservation auctions

a 12-trial, modified dictator game

hypothetical landowners were given the opportunity to make voluntary contributions that were costly to them but beneficial to society

• trials from 1 to 4 and 9 to 12: make voluntary contributions that were costly to them but beneficial to society (without reward – just choosing how much to pay for adoption)

• trials 5-8: introduction of conservative auctions mechanisms (subjects are also rewarded)

Results

the presence of a crowding out effect - engagement levels decreases in trials 9-12;

Crowding-out effect & the environment

Haochen et al (2014): how incentives drive tourists actions in hotels

Two rewards:

- cash discounts

- environmental protective alternatives (washing and ironing of clothes)

subjects were given a questionnaire which measured environmental consciousness and their response to certain incentive types (green behaviour)

The payoff of the Agent and the Principal :

Ua(BETA, e , p) and Up(BETA, e, p)

Results

environmental protective alternatives were more efficient at boosting green behaviour compared to the cash discounts

discounts did not positively affect the motivation

Results

no crowding out effect;

relatively similar motivation for both of the groups;

Is the crowding-out effect less likely to appear when the beneficiaries of the actions are the ones who perform them?

Health related behaviour

Health related behavior

Set et al (2014): study on financial rewards on weight loss initiatives

Two field experiments:

with financial initiatives

without financial initiatives

The Overjustification Effect

• Motivation will determine individuals feeling toward performing a task

• Extrinsic motivations take precedence over intrinsic

• Due to salience of the extrinsic motivation

Introduction

Intrinsic & extrinsic motivation

Self-Perception Theory & Motivation Crowding Theory

• Intrinsic motivation- that which is done for its own sake. Intellectual satisfaction derived from the understanding of a meaningful solution.

• Extrinsic motivation- externally imposed reward or reinforcement. Reward inherent in activity itself.

• Reward becomes a constraint unless it contains positive information about the individuals competency and self-control
• Frey and Regan (2001) Motivation Crowding theory
• Mediation between economic model and pshychological theories
• Informational/supportive (crowding-in) and controlling (crowding-out) aspects of reward on intrinsic motivation
• Empirically relevant and demonstrable across different time-periods and countries

• Crowding-out effect a relatively recent concern in economics

• In psychology referred to as "overjustification effect", "corruption effect", and "hidden cost of reward".

Contents

I / Historical overview & Crowding out theories

II / The Principal-Agent (PA) Paradigm

III/ Recent experiments & Applications

Psychology

Conclusion

Theoretical Development

Earliest evidence

Sharing Economy

Crowding Effect

"Out" & "in"

• Rosenfeld, Folger and Adelman (1980)
• Word games- 2 categories with 2 groups in each.
• Category A: competency condition- paid according to ability.

A1- overperformed.

A2- underperformed.

• Category B: payment-for-completion condition.

B1-paid per completed puzzle.

B2- paid by the hour.

• Earliest experimental demonstration Deci (1971)- payment v non payment to solve puzzles

• First field study

Lepper, Greene and Nisbett (1973)- expected v unexpected rewards for preschool kids

Economics

Pro-social behavior

Thank you for your attention

Introduction

Importance of the context in which rewards occur

PA model

Public policy decision

Some References

• Gneezy U., and Rustichini A. (2000). “A Fine Is a Price.” Journal of Legal Studies, 29, 1–17.

• Mellström, C. and Johannesson, M. (2008) Crowding-out in Blood Donation: was Titmuss right?, Journal of the European Economic Association.

• Benabou, R., & Tirole, J. (2003). Intrinsic and extrinsic motivation. The Review of Economic Studies, 70(3), 489-520.

• Kits, Gerda J. , Adamowicz, Wiktor L. , Boxall, Peter C. (2014) Do conservation auctions crowd-out voluntary environmentally friendly activities?, Ecological Economics, 118-123.

• Schnedler W. & Vanberg C., (2014) Playing ‘hard to get’: An economic rationale for crowding out of intrinsically motivated behavior, European Economic Review, 106–115.

By

Capatina Bogdan

Harvey Diarmuid

Moreau Audrey

Rochvarger Hugo

Behavioral Economics

M2 Eco&Psycho