The limits of monetary incentives

For economists, incentives are everything. For the lazy economist, however, monetary incentives are everything. We tend to concentrate on dollars and cents, but our actions are often motivated by much more than cash. An example from Israel illustrates this beautifully.

Day care centres in the city of Haifa found a common problem; parents were picking up their children late and the centres were forced to supervise uncollected kids past closing time. An easy solution beckoned; implement a fine. Surely by imposing a penalty, there would be an incentive for parents to be on time to collect their brood. Punish behaviour and you will get less of it, right? Everyone expected the fine system to reduce the number of late pickups. Instead, occurrences doubled.

What went wrong?

Previously, parents felt compelled to pick up their kids on time because of the moral and social incentives involved; they didn't want to be a pain or appear neglectful. By introducing a monetary component, the equation changed from being a social and moral decision to being a monetary one and the additional payment justified being late, not punished it.

By introducing money, an action that had previously operated in the realm of morality migrated to the monetary realm and the social and moral reasons for complying with the rules were replaced by pragmatic economic ones. Monetary incentives can do a lot, but they have their limits.