Incentives, Rewards, Motivation and the Receipt of Income Support

FaHCSIA Occasional Paper No. 32

56 Pages Posted: 30 Oct 2010

See all articles by Jacqueline Homel

Jacqueline Homel

The Australian National University - Social Policy Evaluation Analysis and Research Centre

Chris Ryan

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Date Written: October 20, 2010

Abstract

This report summarises the literature on how individuals receiving government income support change their behaviour when faced with new incentives or requirements placed upon them by the government.

Incentives are usually assumed to shift performance in desired directions within economics. However, experimental studies in psychology and economics have shown that incentives do not always improve performance. Sometimes they actually reduce it.

Several theoretical explanations for these effects have been suggested, but the principal one is the crowding out of intrinsic motivation. According to this perspective, the introduction of an incentive might encourage extrinsic motivation for a task at the cost of intrinsic motivation. We provide a conceptual framework for understanding how changes in incentives, sanctions and programs to improve job search effectiveness might affect effort levels by welfare recipients to improve their economic circumstances.

The framework emphasises that there can be great heterogeneity in the way individuals respond to changes, since the specific incentives they face differ. This is because the welfare and taxation parameters they face vary according to their individual circumstances.

The framework was used first to show how changes in incentives might affect effort levels where the preferences of individuals do not adapt to the changed circumstances, and then where they may adapt, as the crowding-out theory of intrinsic motivation implies. While the effect of sanctions and changes to incentives on effort are clear in the first case (but often variable across individuals), they can be ambiguous when preferences can change – as the crowding-out theory implies – especially in the face of sanctions and mandatory activities.

Empirical research on the impact of welfare reform confirms that the individual circumstances of welfare recipients who are subject to reform matter a great deal in understanding their responses. Mean effects over a population may mask quite different responses from groups whose circumstances and incentives differ.

Programs providing forms of in-work benefits for those currently on welfare seem to have a positive impact on participation and employment outcomes, though the effects may be small. Mandatory activities, in the form of requiring welfare recipients to undertake specified activities in return for continued receipt of benefits, are typically successful – individuals tend to undertake those activities. However, individuals substitute them for other activities that may also have been beneficial for the outcomes of interest. Hence, the overall impact of mandatory activities on outcomes may not be positive. Job search programs are a case in point. Where individuals are required to undertake specific forms of job search, they may substitute formal job search for informal forms. In many studies, it seems the short-term effects of programs are very often larger than the longer-term effects they provide.

Suggested Citation

Homel, Jacqueline B and Ryan, Chris, Incentives, Rewards, Motivation and the Receipt of Income Support (October 20, 2010). FaHCSIA Occasional Paper No. 32, Available at SSRN: https://ssrn.com/abstract=1699450

Jacqueline B Homel (Contact Author)

The Australian National University - Social Policy Evaluation Analysis and Research Centre ( email )

Research School of Economics
The Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 2 6125 5096 (Phone)

Chris Ryan

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

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