Incentives outweigh penalties

Stephen Hudspeth

Stephen Hudspeth

Staff / Hearst Connecticut Media

Santa Fe Institute director and economist Samuel Bowles’ book, “The Moral Economy: Why Good Incentives are No Substitute for Good Citizens,” offers fascinating illustrations of how incentives and fines alone can be perverse.

Consider one of his examples drawn from real life: A daycare charges a fee to parents who pick up their child late to discourage lateness, but finds a rise in lateness resulting from what parents now perceive as a price for lateness. The daycare could better have explained to parents the difficulties for children not picked up on time (their children’s anxiety) and for daycare staff held late (missing out on their own family time) —in order to try to induce better compliance by addressing moral motivations of parents.

Likewise, a Boston fire commissioner’s announcement that he was docking pay for overuse of sick days had the opposite of the intended effect: spiking the number of sickness call-ins. It did so by creating a situation in which firefighters perceived that they were “working for a boss who did not trust them;” therefore, they rebelled against him, reflecting also their “adverse reaction to control by others” imposed unfairly. “Crowding out [in this way] affects individuals who are intrinsically…fair-minded…. [Thus,] incentives [can] cause ethical reasoning to recede in people’s minds.”

The threat of sanctions deactivates an area of the brain correlated with more generous action and activates “an area [of the brain] thought to be associated with cost-benefit analysis and other self-interested optimizing.” How can one “design policies that would activate rather than deactivate the neural pathways associated with cooperative and generous behavior?”

In the daycare situation, Bowles suggests that the daycare center inform parents that “We wish to thank you for arriving on time to pick up your children since this reduces the anxiety that the children sometimes feel and allows our staff to leave in a timely manner to be with their own families. We will recognize all parents who have a perfect record unblemished by lateness for the next three months with a significant financial reward to be given at our annual holiday party with an option to contribute your reward to the school’s Teacher of the Year celebration.”

To this, Bowles also suggests —because “punishment works only if it is regarded as legitimate and conveys the signal that the target has violated widely held norms” —could be added a very severe fine for lateness which could be reviewed for fairness in individual cases in light of any special circumstances by a joint parent/teacher committee; the latter adds the important fairness component of “imposition of controls by peers.” This approach directly addresses the otherwise disabling reality that “appeals to self-interest not only fail to tap citizens’ social preferences [their morality or sense of ethics] but may even sideline them.”

In similar fashion, a very successful Irish anti-plastic-grocery-bag campaign “was preceded by…a substantial publicity campaign dramatizing the bags’ role in blighting the environment” —adding a moral message dimension to the campaign. “With the moral message, the ethical concerns were crowded in,” not crowded out by incentives or fines employed alone.

The objective should be “to develop public policies that would allow incentives and constraints to work synergistically rather than at cross-purposes with people’s ethical and other-regarding dispositions….” The possibility that “the right incentives, laws, and other rules of the game can sustainably crowd in social preferences suggest that…making good people should be a public policy objective…to encourage civic action by appealing to both material interests and moral sentiments, framed so that the two work synergistically rather than at cross-purposes.”

An excellent example of what Bowles is talking about is found in what Abraham Lincoln did to persuade dubious Northerners that his Emancipation Proclamation was a wise measure. As explained by Doris Kearns Goodwin in her recent book “Leadership in Turbulent Times,” Lincoln coupled his practical explanation, “Whatever Negroes do as soldiers leaves just so much less for whites to do in saving the Union,” with “If they stake their lives for us, they must be prompted by the strongest motives —even the promise of freedom. And the promise being made, must be kept.”

Bowles’ perspective is both an encouraging and a challenging one. When we ask others to do something important, how do we connect with them with a moral message to inspire action while combining with that message appropriately tailored incentives and fines, and as to the latter include a fairness component? That’s a tall order, but if done well, it offers great promise.