Incentives for prosocial behavior under reputation persistence and policy lags

In this paper we show that a policy based on incentives to promote prosocial activities can be counterproductive in a context where the agents’ reputation exhibits persistence over time and there exists a time lag between announcement of the policy and implementation. Reputation persistence in our model means that the reputation gained in past periods constrains the possibilities of changing reputation in the future. We present a two-period model in which agents use prosocial activities to signal their degree of altruism. If a subsidy is established for the second period, the set of agents that undertake social activities in that period enlarges. This worsens the reputation of the most altruistic agents, some of whom then react by decreasing their involvement in prosocial activities in the first period. We identify a condition under which subsidies cause a decrease in the global supply of pro-social activities.