Regulation of Morally Responsible Agents with Motivation Crowding

We study the regulation of a morally responsible agent in the context of a negative consumption externality and motivation crowding. In particular, we analyze how various governmental interventions affect the agent's motivation to assume moral responsibility. Employing a motivation-crowding model, we find that morally motivated behavior will, in general, not ensure Pareto-efficiency without intervention. A Pigouvian tax may be efficient under motivation crowding. But the efficient tax rate needs to be higher, which may lead to a full crowding-out of moral motivation. By contrast, an inefficiently low tax rate may increase the market failure due to motivation crowding. Provision of information is efficient only in very specific cases, but may be effective in reducing the extent of market failure. A complementary tax-and-information policy is superior to a tax-only policy if the motivation effect of information is larger than its knowledge effect