Economic incentives and social preferences: substitutes or complements?

Explicit economic incentives designed to increase contributions to public goods and to promote other pro-social behavior sometimes are counterproductive or less effective than would be predicted among entirely self-interested individuals. This may occur when incentives adversely affect individuals’ altruism, ethical norms, intrinsic motives to serve the public, and other social preferences. In the 50 experimental studies that we survey these effects are common, so that incentives and social preferences may be either substitutes (crowding out) or complements. We provide evidence for four mechanisms that may account for these incentive effects on preferences, based on the fact that incentives may (i) provide information about the person who implemented the incentive, (ii) frame the decision situation so as to suggest appropriate behavior, (iii) compromise a control averse individual’s sense of autonomy and (iv) affect the process by which people learn new preferences. An implication of the fact that incentives affect preferences is that the evaluation of public policy must be restricted to allocations that are supportable as Nash equilibria when account is taken of these crowding effects. We show that well designed fines, subsidies and the like minimize crowding out and may even do the opposite, making incentives and social preferences complements rather than substitutes