Incentives: Some Things Money Can’t Buy


Not too long ago, I saw a tweet by a friend of mine. The tweet caused quite a stir. It read as follows:

“This man has been persistent in his chase. Eleven months now. Still hasn’t given up. Time to bring out the big guns. Every girl knows the easiest way to chase a man away is to ask him for money.”

This friend of mine believed that asking for money would dissuade the man from his chase. If only she knew how badly that could go. It seems easy to predict what happens when money is used as an incentive (or disincentive). However, using money in this way can have rather unpredictable consequences.

For a long time, economic theory assumed complete rationality of humans (homo economicus) when it came to incentives and decision making. The basic rule is that costs dissuade adverse behaviour and benefits incentivise good behaviour. This rule forms the backbone of a significant number of behaviour-altering methods. However, when money is introduced as a cost, the intended outcome becomes much less predictable.

The unpredictability comes from the complexity of human behaviour and how motives become altered when money is used as a tool to encourage or discourage particular behaviour. Misunderstanding these dynamics can often cause the opposite of the intended effect.

Back to my friend now. Let’s begin to show how her plan could go woefully wrong. The rationale of her tweet was that once she brought up the subject of money, the man would see a cost to his interaction and become discouraged in his pursuit. However, this fails to consider the other side of the equation: a lot of men are quite comfortable using money to get women. It’s the reason philanderers and ‘runs-girls’ exist. These men are fully aware that the women are with them because of the financial benefits they provide. Likewise, it’s the same reason men patronise sex workers. To the man, money acts as an incentive for the woman to offer him what he craves – attention or sex or well, both. The same principle applies to women who patronise male sex workers.

So while my friend sees money as a disincentive to be used against him, he sees it as a tool for incentivising her to give him what he desires. In the end, he intensifies his chase using money. Her attempt to use money as a disincentive backfires.

This is one of several scenarios where using money as a tool for tweaking human behaviour backfires. Freakonomics, the seminal publication on real-world economic applications, tells a fascinating story of what happens when money is used as a disincentive. An Israeli daycare centre plagued by late pickups sent notes to parents who came late. These notes urged the parents to come early in consideration of the staff who had to stay behind to watch the children. The notes had no effect. The daycare changed tactics and set a financial penalty for late pickups. Contrary to the daycare’s expectation, late pickups increased. What went wrong? By placing a financial penalty on late pickups, the daycare had removed the guilt and replaced it with a fee that was low enough for most parents to pay. Effectively, the fee assuaged the parents’ guilt, the only thing depressing late pickups.

The infamous cobra effect is another example of what could go wrong when money is employed as a policy tool. In a bid to reduce the snake population, the Indian government paid snake hunters for every snake caught. They hoped this would solve the problem, instead, enterprising Indians started breeding snakes on snake farms. Once they realised the unintended effect, the administration ended the policy and the snake farmers were left with a quite slippery and useless commodity which they let back into the wild. Thus increasing the number of snakes and worsening the situation. The administration’s policy eventually bit them in the… never mind.

Let’s bring this closer to home. In one of the most ambitious public sector reform experiments in Africa, the Ghanaian government doubled its police officer salaries in 2010 in part to mitigate petty corruption on its roads. A report found that rather than reduce petty corruption, the salary policy significantly increased the value of bribes and the amounts given by truck drivers to policemen in total. Essentially, a higher salary led to higher police ‘appetite’. Moreover, even amongst the officers, the bribe system exists, so when their salary rises, everyone else concurrently adjusts their strategy.

These examples do not mean that all policies that use money to drive incentives are ill-advised. It just means that policy-makers using money as incentives would be better off monitoring how exactly money influences outcomes.

Conditional cash transfers have been quite successful, with anti-poverty programs like Mexico’s Oportunidades, Peru’s Juntos, and Columbia’s Familias en Acción. Nigeria could soon have new conditional cash transfers as well. Even newer are non-conditional cash transfers where money is given without any conditions, usually targeted at covering basic needs rather than altering behaviour.

Simply throwing money at problems has a limit. Understanding how much you need to throw or remove is essential to better policies – and this is hard work. Also, policy tools might be more effective as a hybrid of monetary and moral incentives. Whether you’re trying to get a guy off your back, eradicate snakes or stop corruption, you might want to hold off on the money and consider if there are other ways of solving the problem.

 

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