Behavioral Economics and Psychology of Incentives

Monetary incentives can backfire while nonstandard interventions, such as framing, can be effective in influencing behavior. I review the empirical evidence on these two sets of anomalies. Paying for inherently interesting tasks, paying for prosocial behavior, paying too much, paying too little, and...

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Bibliographic Details
Published in:Annual review of economics 2012-01, Vol.4 (1), p.427-452
Main Author: Kamenica, Emir
Format: Article
Language:English
Subjects:
Airway obstruction
Behavioral economics
Blood donation
Empirical evidence
Field experiments
Financial incentives
Inference
Motivation
Prosocial behavior
Sunk costs
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Summary:Monetary incentives can backfire while nonstandard interventions, such as framing, can be effective in influencing behavior. I review the empirical evidence on these two sets of anomalies. Paying for inherently interesting tasks, paying for prosocial behavior, paying too much, paying too little, and providing too many options can all be counterproductive. At the same time, proper design of the decision-making environment can be a potent way to induce certain behaviors. After presenting the empirical evidence, I discuss the relative role of beliefs, preferences, and technology in the anomalous impacts of incentives. I argue that inference, signaling, loss aversion, dynamic inconsistency, and choking are the primary factors that explain the data.
ISSN:1941-1383
1941-1391
DOI:10.1146/annurev-economics-080511-110909