Do financial incentives deter or encourage co-operative behaviour?
19 December 2013
Attempts to use incentives – especially money – to encourage people to do something they care about often backfire. Such incentives can erode people’s intrinsic motivation or reinforce a culture where people act in their own self-interest.
If we allow this culture to go unchallenged, attempts to increase giving will be swimming against the tide. Instead, we need to build institutional structures and shift social norms to be more focused on the common good.
Received wisdom tells us that self-interest, and by extension money, is and should be driving force of the economy. But there is plenty of evidence – from research in psychology, behavioural economics and anthropology – that proves we all care about a lot more than cash. Altruism, for a variety of reasons, gives us a warm glow.
However, money does wield a huge influence over our behaviour. It can make us value things or devalue them according to the circumstances or setting. Motivation is complex; it is difficult to predict how people will respond to financial incentives.
This report uses learning from behavioural economics to understand when, where and how money drives co-operative behaviour and, equally, why it sometimes doesn’t. It also explores money as a social creation and looks at different types of money that communities have created (often known as ‘community currencies’). Do people respond to these new forms of money in the same ways as they respond to national currencies?
Funded by the Innovation in Giving Fund, it looks at one part of how a “step change in giving” might be brought about in the UK. We focus on the relationship between giving and the economy – specifically whether people can be financially incentivised to behave cooperatively.
We define giving broadly. We are interested less in giving to charity and more in the behaviour patterns and social norms that shape the way we treat other people.
Most of us agree that some things are too precious to buy, sell or trade on markets. Attempts to financially motivate people into volunteering for something they already care about often backfire.
Of course, different people are motivated by different things, and in different ways. But the line between altruism and self-interest is not as clear-cut as traditional economics would have us believe. In many cultures round the world, trade and giving are indistinguishable. In fact, even the most basic economic model of self-interested behaviour can lead people to behave co-operatively.
This report proposes a framework with five, interlinked problems that arise when using money to reward giving or altruistic behaviour. These apply to a range of policy areas, from commissioning public services and deciding whether to use methods such as ‘payment by results’, through to giving incentives to employers for adopting a living wage policy.
The framework above highlights the problems financial incentives can cause, but of course this is not the whole story. Where motivation to do something doesn’t exist, money can bring it into being. For example, paying someone to do a training course may mean they value it less than if they pay for it themselves, or contribute something in return. There are also many examples where incentives have been used in a public policy setting and worked well.
A balance needs to be made between rewarding people for what they do, and respecting their ability to use judgement and human compassion.
So is it possible to change how money works? We examine this question by looking at complementary currencies. Most of these are designed with social goals in mind, so they do not affect motivation in the same way and send out different social signals.
To sum up, policy makers who are considering using financial motivation to promote pro-social behaviour, should proceed with caution. There will always be people who are more likely to give than others, but everyone will alter their behaviour according to social situations, peer pressure and setting. In some situations offering a financial reward can increase effort on the outcome you are incentivising at the expense of other, equally valuable work. There may also be other forms of money that are more suited to the task.
Banking & finance
The New Economics Foundation depends on its supporters’ generosity. If you value what we do, please consider making a donation.
Over a hundred experts have signed a letter calling for Andrew Bailey to use the Bank to tackle the climate crisis.
Frank van Lerven
04 March 2020
How central banks can address the financial risks and support a capital shift away from coal.
05 February 2020
The recession of a decade ago looms very large in our collective memory. But what actually causes a recession?
08 November 2019
We are campaigning for a fairer and more compassionate system
Unfair Debt Group
01 November 2019