1. Crowding Out
Econ 333
Fall 2014
Copyright James J. Murphy. Material may not be reproduced or redistributed without permission.

2. Intrinsic motivation
“an activity has a motivation of its own, independent of any reward, called intrinsic motivation”
Crowding out: “A reward, different from this intrinsic motivation (in particular, but not only, a monetary reward) may replace the intrinsic motivation. The net effect may be a reduction of the overall motivation, and hence a reduction of the activity itself.”
Gneezy Rusticini, QJE 2000, Pay Nothing…

3. Crowding out
Crowding out, if it exists, is one of the most important anomalies in economics.
Suggests that raising monetary incentives reduces, rather than increases, supply.
Frey & Jegen

4. Crowding out & crowding in
External interventions via monetary incentives or punishments may undermine intrinsic motivation
Titmuss (1970) expressed concerns that paying for blood could eliminate voluntary donations
Was Titmuss right??
Niza, Tung, Marteau. Health Psychology, 2013
Meta-analysis of 7 studies
Quantity & quality of donated blood when (a) offer incentive or (b) no incentive
Find no evidence of crowding out

5. Mellström, Johannesson (2008)
Field experiment test of Titmuss hypothesis
T1: No compensation
T2: Paid SEK 50 (about $7)
T3: Choose SEK 50 or have SEK 50 donated to charity
Results
Men: No effect
Women:
Significant crowding out effect (T1 vs T2)
Significant effect of charity donation, offsets crowding out (T1 vs T3)

6. Results

7. Frey Oberholzer-Gee AER 1997
CV survey, not an experiment
Asked Swiss residents about willingness permit the construction of a nuclear waste repository for short-lived, low- and midlevel radioactive waste on the grounds of their community
50% yes
45% no
5% didn’t care

8. Frey Oberholzer-Gee AER 1997
Then asked if they’d accept the nuclear waste site if each individual were compensated.
Varied amounts $ $4350 per person
Support dropped from 50.8% to 24.6%
Lack of support not affected by $$ amounts

9. Gneezy & Rustischini Theory of Crime (Becker 1964)
People will weigh benefits of crime with expected costs (= probability of getting caught ´ fine)
Increases in fines should reduce negative behavior
Consistent with results in legal studies, psychology
Fines as a deterrent

10. Field experiment
Problem: parents were arriving late to pick up children from Israeli day care centers
Incomplete contract: consequences of being late never explained to parents
Hypothesis: introducing a fine for late pick ups should reduce frequency

11. Study design 10 private day care centers in Haifa
Same general area, no significant differences among them
Tuition NIS 1400 (US$380/month)
Observed over 20 weeks
Weeks 1-4: Observe late arrivals
Weeks 5-16: Impose small fine in 6 of 10 centers
(no fine in other 4 “control” centers) fine = NIS 10 ($2.72)
Weeks 17-20: Fine removed

12. Results Control: no change over time
Fine: increased late arrivals. Remained after fine removed

13. Comparison of medians and extreme values

14. Test
Control

15. Key results Fact 1: Introducing fine INCREASED late arrivals
Fact 2: Removing fine had no effect on late arrivals (vis-à-vis with fine)
Fact 3: No difference between control & test groups
No trends in test group

16. Interpreting results Need to explain two outcomes:
Increase as a result of fine
Persistence after fine removed
Characteristics of the “crime”
Minor offense
Small fine
Perfect monitoring
Assume (not prove): Fine changes people’s perception of the social situation

17. Implicit contract?
“We are going to take care of your children after closing time if you come late. We are not going to put a price schedule for this extra service, which will therefore be performed free of charge. Of course, any delay on your part is supposed to be an exceptional case, and you should come late only when strictly necessary. If you come late too often, we might do something about it.’’
In order to avoid this unspecified and uncertain but possibly more serious consequence, parents abstain from “too many” delays ??
Fine removes uncertainty about worst case scenario?

18. Social norms?
Stage 1. Teachers engaged in generous, non-market activity
Stage 2. Fine is a price
Stage 3. Once a commodity always a commodity
Payment changes perception from a service to a market exchange?

19. Frey & Jegen Motivation Crowding Out
External interventions via monetary incentives or punishments may undermine intrinsic motivation
Titmuss (1970) expressed concerns that paying for blood could eliminate voluntary donations
Neither Solow nor Arrow could explain why this might be the case
Cognitive social psychologists
Indirect negative consequences

20. Crowding out effect Important anomaly in economics
Violates laws of supply & demand
Under some circumstances, using prices/fines may be counter-productive.
May need to rely instead on intrinsic motivation

21. Theory Possible sources of movement along spectrum:
Extrinsic
motivation
Intrinsic
motivation
Possible sources of movement along spectrum:
Change in preferences
Change in perceived nature of the task

22. Some potential implications
Labor: performance wages
Environmental pricing instruments
Social policy: does $ crowd out notion of responsibility for one’s own fate?
Subsidies: possible negative effects on entrepreneurship
Charitable giving: do government programs crowd out private giving?

23. Psychology Meta-study by Deci et al (1999)
Meta-analysis of 128 studies
Mention shortcomings and misinterpretations in other studies
Tangible rewards have a negative effect on intrinsic motivation for interesting tasks
Negative effect of rewards: undermine self-regulation
People take less responsibility for motivating themselves

24. Economics