Journal of Economic Perspectives—Volume 25, Number 4—Fall 2011—Pages 191–210 When and Why Incentives (Don’t) Work to Modify Behavior Uri Gneezy, Stephan Meier, and Pedro Rey-Biel cconomistsonomists ooftenften eemphasizemphasize tthathat ““incentivesincentives mmatter.”atter.” TThehe bbasicasic ““lawlaw ooff bbehavior”ehavior” iiss tthathat hhigherigher iincentivesncentives wwillill lleadead ttoo mmoreore eeffortffort aandnd hhigherigher E pperformance.erformance. EEmployers,mployers, fforor eexample,xample, ooftenften uusese eextrinsicxtrinsic iincentivesncentives ttoo mmotivateotivate ttheirheir eemployees.mployees. IInn rrecentecent years,years, thethe useuse ofof incentivesincentives inin behavioralbehavioral inter-inter- vventionsentions hashas bbecomeecome moremore ppopular.opular. ShouldShould sstudentstudents bebe providedprovided withwith fi nancialnancial iincentivesncentives forfor iincreasedncreased sschoolchool aattendance,ttendance, fforor reading,reading, oorr forfor bbetteretter grades?grades? WillWill fi nnancialancial iincentivesncentives eencouragencourage higherhigher contributionscontributions toto publicpublic goods,goods, likelike bloodblood ddonations?onations? SShouldhould pprogramsrograms ttoo rreduceeduce ssmokingmoking oorr ttoo eencouragencourage eexercisexercise iincludenclude a mmonetaryonetary iincentive?ncentive? TThesehese aapplicationspplications ooff incentivesincentives hhaveave provokedprovoked heatedheated debate.debate. PProponentsroponents ooff uusingsing iincentivesncentives iinn bbehavioralehavioral iinterventionsnterventions aargue,rgue, fforor eexample,xample, tthathat mmonetaryonetary iincentivesncentives cancan bbee hhelpfulelpful iinn gettinggetting ppeopleeople ttoo studystudy oror exerciseexercise more.more. OOpponentspponents bbelieveelieve tthathat uusingsing incentivesincentives iinn tthosehose aareasreas ccouldould backfibackfi re,re, becausebecause eextrinsicxtrinsic iincentivesncentives mmayay iinn ssomeome wwayay ccrowdrowd ooutut iintrinsicntrinsic mmotivationsotivations tthathat aarere iimpor-mpor- ttantant ttoo pproducingroducing tthehe ddesiredesired bbehavior.ehavior. TThishis ppaperaper pproceedsroceeds bbyy discussingdiscussing somesome ggeneraleneral aaspectsspects ooff hhowow extrinsicextrinsic iincentivesncentives mmayay ccomeome iintonto cconflonfl iictct withwith otherother motivations.motivations. ForFor example,example, monetarymonetary iincentivesncentives ffromrom pprincipalsrincipals maymay cchangehange hhowow ttasksasks aarere perceivedperceived bbyy aagents.gents. IIff iincen-ncen- ttivesives aarere nnotot llargearge enough,enough, tthishis cchangehange inin pperceptionerception cancan leadlead ttoo undesiredundesired effectseffects oonn bbehavior.ehavior. IInn ootherther cases,cases, incentivesincentives mightmight havehave thethe desireddesired effectseffects inin thethe shortshort tterm,erm, bbutut ttheyhey sstilltill wweakeneaken iintrinsicntrinsic mmotivations.otivations. TThus,hus, ooncence tthehe iincentivesncentives aarere ■ UUriri GGneezyneezy iiss PProfessorrofessor ooff EEconomicsconomics aandnd Strategy,Strategy, RadyRady SchoolSchool ofof Management,Management, UUniversityniversity ooff CCalifornia–Sanalifornia–San DDiego,iego, LLaa JJolla,olla, CCalifornia.alifornia. SStephantephan MMeiereier iiss AAssociatessociate PProfessor,rofessor, CColumbiaolumbia BBusinessusiness SSchool,chool, NNewew YYorkork CCity,ity, NNewew YYork.ork. PPedroedro RRey-Bieley-Biel iiss AAssociatessociate PProfessor,rofessor, UniversitatUniversitat AutònomaAutònoma dede Barcelona,Barcelona, Barcelona,Barcelona, Spain.Spain. TheirTheir e-maile-mail addressesaddresses areare 〈[email protected]@ucsd.edu〉, 〈[email protected]@columbia.edu〉, aandnd 〈 [email protected]@uab.es〉. doi=10.1257/jep.25.4.191 192 Journal of Economic Perspectives rremoved,emoved, ppeopleeople mmayay ppursueursue tthehe ddesiredesired ooutcomeutcome llessess eeagerly.agerly. TToo pputut iitt iinn cconcreteoncrete tterms,erms, aann iincentivencentive fforor a cchildhild toto readread moremore mightmight achieveachieve thatthat goalgoal inin thethe shortshort tterm,erm, bbutut tthenhen bbee ccounterproductiveounterproductive asas aann iincentivencentive fforor sstudentstudents ttoo enjoyenjoy readingreading aandnd sseekeek iitt ooutut ooverver ttheirheir llifetimes.ifetimes. TThehe ffollowingollowing ssectionsections ooff tthehe ppaperaper tthenhen ddiscussiscuss tthehe rresearchesearch lliteratureiterature oonn threethree importantimportant eexamplesxamples iinn wwhichhich mmonetaryonetary iincentivesncentives hhaveave bbeeneen uusedsed iinn a nnonemploymentonemployment ccontextontext ttoo ffosteroster tthehe ddesiredesired bbehavior:ehavior: eeduca-duca- ttion;ion; iincreasingncreasing ccontributionsontributions toto publicpublic goods;goods; aandnd hhelpingelping peoplepeople changechange theirtheir llifestyles.ifestyles. TThehe cconclusiononclusion ssumsums uupp ssomeome llessonsessons oonn wwhenhen eextrinsicxtrinsic incentivesincentives areare mmoreore oorr llessess llikelyikely ttoo aalterlter ssuchuch bbehaviorsehaviors iinn tthehe ddesiredesired ddirections.irections. TThehe PPotentialotential CCrowding-Outrowding-Out EffectEffect vversusersus EExtrinsicxtrinsic IIncentivesncentives MMonetaryonetary iincentivesncentives hhaveave ttwowo kkindsinds ooff eeffects:ffects: tthehe sstandardtandard ddirectirect ppricerice eeffect,ffect, wwhichhich mmakesakes tthehe iincentivizedncentivized bbehaviorehavior mmoreore aattractive,ttractive, aandnd aann iindirectndirect ppsychologicalsychological eeffect.ffect. IInn ssomeome ccases,ases, tthehe ppsychologicalsychological eeffectffect wworksorks iinn aann ooppositepposite ddirectionirection ttoo tthehe ppricerice eeffectffect aandnd ccanan ccrowdrowd ooutut tthehe iincentivizedncentivized bbehavior.ehavior. SSeveraleveral ppapersapers iinn rrecentecent yyearsears hhaveave sshownhown tthathat ssuchuch ccrowding-outrowding-out eeffectsffects ccanan bbee hhandledandled wwithith ffairlyairly sstandardtandard eeconomicconomic mmodelingodeling ooff pprincipal–agentrincipal–agent pproblemsroblems tthathat uusese nnonstandardonstandard aassumptions.ssumptions. IInn thethe modelmodel ofof BenabouBenabou andand TiroleTirole ((2006),2006), fforor eexample,xample, iindividualsndividuals havehave a uutilitytility ffunctionunction wwithith tthreehree mainmain components:components: ttheyhey vvaluealue eextrinsicxtrinsic rrewards,ewards, enjoyenjoy ddoingoing anan aactivity,ctivity, aandnd ccareare aaboutbout theirtheir iimagemage vis-à-visvis-à-vis themselvesthemselves oror others.others. TheThe iimagemage ccomponentomponent ddependsepends oonn tthehe vvaluealue theythey oorr someonesomeone eelselse attributesattributes toto theirtheir iintrinsicntrinsic aandnd eextrinsicxtrinsic mmotivationotivation aass a functionfunction ooff theirtheir eeffortffort levellevel andand incentives.incentives. TThishis iimagemage mmotivationotivation ddependsepends oonn hhowow mmuchuch iindividualsndividuals carecare fforor ttheirheir reputationreputation aandnd mmayay bbee aaffectedffected bbyy hhowow ppublicublic ssuchuch aann iimagemage iis.s. IIndividualndividual ppreferencesreferences forfor thethe eenjoymentnjoyment ooff ttasksasks aandnd fforor tthehe iimagemage ccomponentomponent ooff ttheirheir uutilitytility mmayay ddifferiffer bbetweenetween ppeopleeople aandnd aarere aassumedssumed ttoo bbee pprivaterivate iinformation.nformation. TThishis ttypeype ooff mmodelodel iillustratesllustrates ssomeome pprincipalrincipal cchannelshannels tthroughhrough wwhichhich iincen-ncen- ttivesives ccanan aaffectffect aagents’gents’ decisionsdecisions aboutabout eeffort.ffort. OneOne channelchannel isis information.information. InIn a pprivate-goodrivate-good contextcontext wwithoutithout imageimage cconcernsoncerns andand inin wwhichhich thethe pprincipalrincipal isis betterbetter iinformednformed tthanhan thethe aagent,gent, tthehe pprincipalrincipal chooseschooses a rrewardeward levellevel basedbased onon severalseveral ffactors,actors, iincludingncluding hhowow tthehe pprincipalrincipal vviewsiews tthehe ddiffiiffi ccultyulty oror aattractivenessttractiveness ofof thethe tasktask ttoo bbee pperformederformed aandnd hhowow tthehe principalprincipal viewsviews thethe intrinsicintrinsic motivationmotivation oror abilityability ofof tthehe aagent.gent. FForor eexample,xample, offeringoffering iincentivesncentives fforor improvedimproved academicacademic performanceperformance inin sschoolschools mmayay ssignalignal tthathat aachievingchieving a sspecifipecifi c goalgoal iiss diffidiffi cult,cult, thatthat tthehe tasktask iiss notnot attrac-attrac- ttive,ive, oorr tthathat tthehe agentagent isis nnotot well-suitedwell-suited forfor itit (and(and thusthus needsneeds thethe additionaladditional incentiveincentive ooff a rreward).eward). AAlternatively,lternatively, oofferingffering incentivesincentives couldcould signalsignal thatthat thethe principalprincipal doesdoes nnotot ttrustrust tthehe agent’sagent’s iintrinsicntrinsic motivation.motivation. ThisThis signalsignal willwill bebe “bad“bad news”news” forfor thethe agentagent aandnd ccanan llowerower tthehe iintrinsicntrinsic mmotivationotivation ooff tthehe aagentgent ttoo uundertakendertake tthehe ttask.ask. A ssecondecond cchannelhannel fforor crowdingcrowding outout appearsappears whenwhen extrinsicextrinsic incentivesincentives reducereduce ootherther mmotivesotives forfor uundertakingndertaking tthehe ttask,ask,