Using money as an incentive privately and publicly can be more complicated then we think.
Paying For Grades
Assume that a mom offers her son $10 for every “A” on his report card. There are several possible results.
- Higher grades: Delighted with the dollars, he could work harder, get all A’s, become his class’s valedictorian and attend Yale or Harvard.
- Higher grades at first; Only when money is offered will this young man excel. In the long run, the tactic is counterproductive.
- Lower Grades: Somewhat rebellious, he knows he can infuriate his mother with a “C” average.
- Insecurity: Unsure of his academic talents, he feels more insecure because of the offer. After all, why would they offer him money? Don’t they trust him?
Would dollar incentives work to diminish water usage in California? Two studies provide some clues.
Let’s say that people were paid to use less water. With blood donors, contributions diminished when a donor program offered a cash incentive. Researchers believe the money award “crowded out” the prosocial behavior from the people willing to give blood for free.
Okay, so what about penalties for over usage? We could cite an Israeli daycare center that decided to charge parents who were late picker uppers. The result was more late pick-ups. Researchers hypothesize that the charge placed a price on arriving late. Because the amount was relatively small, parents thought coming on time really wasn’t that important. I would like to add the possibility that the charge let people feel they were paying for the right to be late and some were happy to do that.
Our Bottom Line: Unintended Consequences
When a dollar incentive generates the intended result, we have an example of the standard price effect. If the opposite occurs, then we are seeing the indirect psychological effect whereby money is “crowding out” the intended result.
In the intrinsic and extrinsic incentive literature there is lots of analysis on when money incentives do and do not work. The one common thread involves the likelihood of unintended consequences.