Another Hidden Cost of Incentives: The Detrimental Effect on Norm Enforcement

Management Science, Vol. 56, No. 1, pp. 57-70, 2010

Posted: 31 Oct 2011 Last revised: 1 Nov 2011

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Stephan Meier

Federal Reserve Bank of Boston; IZA Institute of Labor Economics; Columbia Business School - Management

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Date Written: January 1, 2010

Abstract

Monetary incentives, such as subsidies or bonuses, are often considered as a way to foster contributions to public goods in society and firms. This paper investigates experimentally the effect of private contribution incentives in the presence of a norm enforcement mechanism. Norm enforcement through peer punishment has been shown to be effective in raising contributions by itself. We test whether and how (centrally provided) private incentives interact with (decentralized) punishment, both of which affect subjects’ monetary payoffs. The results of our experiment show that private incentives for contributors can reduce the effectiveness of the norm enforcement mechanism: Free riders are punished less harshly in the treatment with incentives, and as a consequence, average contributions to the public good are no higher than without incentives. This finding ties to and extends previous research on settings in which monetary incentives may fail to have the desired effect.

Keywords: public goods, prosocial behavior, norm enforcement, hidden cost of incentives, experimental economics

Suggested Citation

Fuster, Andreas and Meier, Stephan, Another Hidden Cost of Incentives: The Detrimental Effect on Norm Enforcement (January 1, 2010). Management Science, Vol. 56, No. 1, pp. 57-70, 2010, Available at SSRN: https://ssrn.com/abstract=1951643

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

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Stephan Meier

Federal Reserve Bank of Boston ( email )

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Boston, MA 02210
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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Columbia Business School - Management ( email )

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