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Optimal Incentives with State-Dependent Preferences

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  • SAMUEL BOWLES
  • SUNG-HA HWANG

Abstract

In both experimental and natural settings, incentives sometimes underperform, generating smaller effects on the targeted behaviors than would be predicted for entirely self-regarding agents. A parsimonious explanation is that incentives that appeal to self-regarding economic motives may crowd out noneconomic motives such as altruism, reciprocity, intrinsic motivation, ethical values, and other social preferences, leading to disappointing and sometimes even counterproductive incentive effects. We present evidence from behavioral experiments that crowding may take two forms: categorical (the effect on preferences depends only on the presence or absence of the incentive) or marginal (the effect depends on the extent of the incentive). We extend an earlier contribution (Bowles and Hwang, ) to include categorical crowding, thus providing a more general framework for the study of optimal incentives and as a result, an expanded range of situations for which the sophisticated planner will (surprisingly) make greater use of incentives when incentives crowd out social preferences than when motivational crowding is absent.

Suggested Citation

  • Samuel Bowles & Sung-Ha Hwang, 2014. "Optimal Incentives with State-Dependent Preferences," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(5), pages 681-705, October.
  • Handle: RePEc:bla:jpbect:v:16:y:2014:i:5:p:681-705
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    File URL: http://hdl.handle.net/10.1111/jpet.12077
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    References listed on IDEAS

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    Cited by:

    1. Sung-Ha HwangBy & Jungmin Lee, 2017. "Conspicuous consumption and income inequality," Oxford Economic Papers, Oxford University Press, vol. 69(4), pages 870-896.
    2. Nayoung Kim & Sung-Ha Hwang, 2015. "Evolution of Altruistic Preferences among Boundedly Rational Agent," Korean Economic Review, Korean Economic Association, vol. 31, pages 239-266.
    3. Samuel Bowles & Sandra Polania-Reyes, 2011. "Economic incentives and social preferences: substitutes or complements?," Department of Economics University of Siena 617, Department of Economics, University of Siena.
    4. Samuel Bowles & Sandra Polania-Reyes, 2012. "Economic Incentives and Social Preferences: Substitutes or Complements?," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 368-425, June.

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