When Financial Incentives Backfire

Financial Incentives BackfirePeople normally feel a strong drive to acquire resources and to avoid losses, so various incentives, including financial incentives, can be a powerful tool for encouraging socially desirable behaviors. Yet, the effects of financial incentives are not always straightforward or linear. There are many psychological complications, but one basic rule is to avoid using incentives when people already hold favorable opinions or when they might be motivated by altruistic or other non-monetary considerations.

Intrinsic Motivation and External Rewards

Financial incentives or other material rewards can backfire when people already hold a certain belief or support a certain position for intrinsic reasons. In such cases, offering them money may lead to less support for that position. [1] Similarly, when people are doing some task because they naturally enjoy it, offering financial rewards may reduce their intrinsic motivation and will ultimately have negative effects when financial incentives become insufficient.

Altruistic Behavior and Incentives

Offering financial rewards is also likely to backfire when people are behaving altruistically or because of their civic duty. For instance, when blood donors are given money, they become less willing to donate blood. [2] Another example comes from a 1997 Swiss field study by Bruno Frey and Felix Obelhozer-Gee. Swiss residents were asked if they would agree that nuclear waste repositories would be built near their hometowns. [3] Some people were not offered any compensation, others were offered a monetary compensation of either $2,175, or $4,350, or $6,525 a year for an individual. Without monetary compensation, 50.8% of the respondents agreed that the repository would be built, but only 24.6% agreed when offered money.

Sources

  1. Carl Benware and Edward L. Deci, Attitude Change as a Function of the Inducement for Espousing a Proattitudinal Communication, Journal of Experimental Social Psychology, 11, 271-278 (1975).
  2. Richard M. Titmuss, The Gift  Relationship (London: Allen and Unwin, 1970).
  3. Bruno S. Frey and Felix Oberholzer-Gee, The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding Out, American Economic Review, 87, 746-55 (1997).