An incentive is something that motivates an individual to perform an action. It is therefore essential to the study of any economic activity. Incentives, whether they are intrinsic or extrinsic (traditional), can be effective in encouraging behavior change, such as ceasing to smoke, doing more exercise, complying with tax laws or increasing public good contributions. Traditional incentives can effectively encourage behavior change, as they can help to both create desirable and break undesirable habits. Providing upfront incentives can help the problem of present bias – people’s focus on immediate gratification. Finally, incentives can help people overcome barriers to behavior change (Gneezy et al., 2019).

Traditionally the importance of intrinsic incentives was underestimated, and the focus was put on monetary ones. Monetary incentives may backfire and reduce the performance of agents or their compliance with rules (see also overjustification effect), especially when motives such as the desire to reciprocate or the desire to avoid social disapproval (see social norms) are neglected. These intrinsic motives often help to understand changes in behavior (Fehr & Falk, 2002).

In the context of prosocial behavior, extrinsic incentives may spoil the reputational value of good deeds, as people may be perceived to have performed the task for the incentives rather than for themselves (Bénabou & Tirole, 2006). Similarly, performance incentives offered by an informed principal (manager, teacher or parent) can adversely impact an agent’s (worker, student or child) perception of a task or of his own abilities, serving as only weak reinforcers in the short run and negative reinforcers in the long run (Bénabou & Tirole, 2003). (For an interesting summary of when extrinsic incentives work and when they don’t in nonemployment contexts, see Gneezy et al., 2011).

 

Bénabou, R. & Tirole, J. (2003). Intrinsic and extrinsic motivation. Review of Economic Studies, 30, 489-520.

Bénabou, R. & Tirole, J. (2006). Incentives and prosocial behavior. American Economic Review, 96(5), 1652-1678.

Fehr, E. & Falk, A. (2002). Psychological foundations of incentives. European Economic Review, 46(4-5), 687-724.

Gneezy, U., Kajackaite, A., & Meier, S. (2019). Incentive-based interventions. Forthcoming in the Handbook of Behavior Change.

Gneezy, U., Meier, S. & Rey-Biel, P. (2011). When and why incentives (don’t) work to modify behavior. Journal of Economic Perspectives, 25(4), 191-210.