Self interest versus the common good in economic policy design.

An essay by Bowles in Science points to a shortcoming in the conventional economic approach to policy design: It overlooks the possibility that economic incentives (i.e. those appealing to self-regarding preferences) may diminish ethical or other reasons for complying with social norms and contributing to the common good. Where this is the case, the kinds of incentives stressed by economists may have counterproductive effects.

Diego Rivera's mural of factory workers at Ford's River Rouge assembly plant (detail). Modern economies require cooperation toward common ends among countless individuals, often occurring as the result of both self-interested and ethical motives. Recent behavioral experiments show that organizational strategies may backfire if they rely solely on explicit economic incentives and seek to limit the options of group members.

One interesting real-life experiment:

In Haifa, at six day care centers, a fine was imposed on parents who were late picking up their children at the end of the day. Parents responded to the fine by doubling the fraction of time they arrived late. When after 12 weeks the fine was revoked, their enhanced tardiness persisted unabated. While other interpretations are possible, the counterproductive imposition of the fines illustrate a kind of negative synergy between economic incentives and moral behavior. The fine seems to have undermined the parents' sense of ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as just another commodity they could purchase.

Here is the abstract of the article:

High-performance organizations and economies work on the basis not only of material interests but also of Adam Smith's "moral sentiments." Well-designed laws and public policies can harness self-interest for the common good. However, incentives that appeal to self-interest may fail when they undermine the moral values that lead people to act altruistically or in other public-spirited ways. Behavioral experiments reviewed here suggest that economic incentives may be counterproductive when they signal that selfishness is an appropriate response; constitute a learning environment through which over time people come to adopt more self-interested motivations; compromise the individual's sense of self-determination and thereby degrade intrinsic motivations; or convey a message of distrust, disrespect, and unfair intent. Many of these unintended effects of incentives occur because people act not only to acquire economic goods and services but also to constitute themselves as dignified, autonomous, and moral individuals. Good organizational and institutional design can channel the material interests for the achievement of social goals while also enhancing the contribution of the moral sentiments to the same ends.

And here is the PDF.