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Crowding Out

Econ 333

Fall 2014

Copyright James J. Murphy. Material may not be reproduced or redistributed without permission.

Intrinsic motivation

“an activity has a motivation of its own, independent of any reward, called intrinsic motivation”

Crowding out: “A reward, different from this intrinsic motivation (in particular, but not only, a monetary reward) may replace the intrinsic motivation. The net effect may be a reduction of the overall motivation, and hence a reduction of the activity itself.”

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Crowding out

Crowding out, if it exists, is one of the most important anomalies in economics.

Suggests that raising monetary incentives reduces, rather than increases, supply.

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Crowding out & crowding in

External interventions via monetary incentives or punishments may undermine intrinsic motivation

Titmuss (1970) expressed concerns that paying for blood could eliminate voluntary donations

Was Titmuss right??

Niza, Tung, Marteau. Health Psychology, 2013 Meta-analysis of 7 studies Quantity & quality of donated blood when (a) offer

incentive or (b) no incentive Find no evidence of crowding out

Mellström, Johannesson (2008)

Field experiment test of Titmuss hypothesis

T1: No compensation

T2: Paid SEK 50 (about $7)

T3: Choose SEK 50 or have SEK 50 donated to charity

Results Men: No effect Women:

Significant crowding out effect (T1 vs T2) Significant effect of charity donation, offsets crowding out (T1 vs

T3)

Results

Frey Oberholzer-Gee AER 1997

CV survey, not an experiment

Asked Swiss residents about willingness permit the construction of a nuclear waste repository for short-lived, low- and midlevel radioactive waste on the grounds of their community50% yes45% no5% didn’t care

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Frey Oberholzer-Gee AER 1997

Then asked if they’d accept the nuclear waste site if each individual were compensated.Varied amounts $2175 - $4350 per person

Support dropped from 50.8% to 24.6%Lack of support not affected by $$ amounts

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Gneezy & Rustischini

Theory of Crime (Becker 1964)People will weigh benefits of crime with expected

costs (= probability of getting caught ´ fine) Increases in fines should reduce negative

behavior

Consistent with results in legal studies, psychology

Fines as a deterrent

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Field experiment

Problem: parents were arriving late to pick up children from Israeli day care centers

Incomplete contract: consequences of being late never explained to parents

Hypothesis: introducing a fine for late pick ups should reduce frequency

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Study design

10 private day care centers in Haifa Same general area, no significant differences among them Tuition NIS 1400 (US$380/month)

Observed over 20 weeks Weeks 1-4: Observe late arrivals Weeks 5-16: Impose small fine in 6 of 10 centers

(no fine in other 4 “control” centers)fine = NIS 10 ($2.72)

Weeks 17-20: Fine removed

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Results

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Control: no change over time

Fine: increased late arrivals. Remained after fine removed

Comparison of medians and extreme values

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Key results

Fact 1: Introducing fine INCREASED late arrivals

Fact 2: Removing fine had no effect on late arrivals (vis-à-vis with fine)

Fact 3: No difference between control & test groupsNo trends in test group

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Interpreting results

Need to explain two outcomes: Increase as a result of finePersistence after fine removed

Characteristics of the “crime”Minor offenseSmall finePerfect monitoring

Assume (not prove): Fine changes people’s perception of the social situation

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Implicit contract?

“We are going to take care of your children after closing time if you come late. We are not going to put a price schedule for this extra service, which will therefore be performed free of charge. Of course, any delay on your part is supposed to be an exceptional case, and you should come late only when strictly necessary. If you come late too often, we might do something about it.’’In order to avoid this unspecified and uncertain but possibly more serious consequence, parents abstain from “too many” delays ?? Fine removes uncertainty about worst case scenario?

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Social norms?

Stage 1. Teachers engaged in generous, non-market activity

Stage 2. Fine is a price

Stage 3. Once a commodity always a commodity

Payment changes perception from a service to a market exchange?

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Frey & Jegen

Motivation Crowding OutExternal interventions via monetary incentives or

punishments may undermine intrinsic motivation

Titmuss (1970) expressed concerns that paying for blood could eliminate voluntary donationsNeither Solow nor Arrow could explain why this

might be the case

Cognitive social psychologists Indirect negative consequences

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Crowding out effect

Important anomaly in economics

Violates laws of supply & demand

Under some circumstances, using prices/fines may be counter-productive.May need to rely instead on intrinsic motivation

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Theory

Possible sources of movement along spectrum:Change in preferencesChange in perceived nature of the task

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Intrinsicmotivation

Extrinsicmotivation

Some potential implications

Labor: performance wages

Environmental pricing instruments

Social policy: does $ crowd out notion of responsibility for one’s own fate?

Subsidies: possible negative effects on entrepreneurship

Charitable giving: do government programs crowd out private giving?

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Psychology

Meta-study by Deci et al (1999)Meta-analysis of 128 studiesMention shortcomings and misinterpretations in

other studiesTangible rewards have a negative effect on

intrinsic motivation for interesting tasksNegative effect of rewards: undermine self-

regulationPeople take less responsibility for motivating

themselves

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Economics

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