Money that Costs Too Much: Regulating Financial Incentives
53 Pages Posted: 15 Nov 2018
Date Written: 2018
Money may not corrupt. But should we worry if it corrodes? Legal scholars in a range of fields have expressed concern about “motivational crowding-out,” a process by which offering financial rewards for good behavior may undermine laudable social motivations, like professionalism or civic duty. Disquiet about the motivational impacts of incentives has now extended to health law, employment law, tax, torts, contracts, criminal law, property, and beyond. In some cases, the fear of crowding-out has inspired concrete opposition to innovative policies that marshal incentives to change individual behavior. But to date, our fears about crowding-out have been unfocused and amorphous; our field lacks the language we need to speak precisely about these behavioral phenomena, and we have not examined when and why motivational crowding-out should prompt us to discontinue or temper incentive based schemes. Without a clear and nuanced picture of the processes, harms, and benefits of crowding-out, we may well be missing the mark.
This Article canvasses the range of legal areas where crowding-out concerns arise, and it newly illuminates the specific harms that may be attributable to crowding-out effects. These hazards include reduced autonomy in the presence of incentives, a distinct set of behavioral inefficiencies, and the potential degradation of individual or social values. But this Article also challenges the view of crowding out as uniformly harmful, offering an alternative vision of potential crowding-out benefits, such as crowding out invidious motivations, increasing the predictability of agent activity, and bolstering the efficiency of future incentives. These benefits suggest that the precautionary principle, which would counsel against using incentives where crowding-out is possible—is inappropriate for this field.
The Article also proposes a novel taxonomy to help guide regulatory responses to incentives that cause crowding-out. Different categories of incentives present different justifications for regulatory intervention and redesign, including autonomy concerns, efficiency concerns, and negative externalities imposed on third parties. By organizing incentives based on the relationship between the principal and agent, we can identify opportunities for regulators and incentive architects to redesign or limit incentive programs, to leave incentives in place, or to consider discontinuing incentive-based policies when money indeed “costs too much” in motivation.
Keywords: financial regulation, social motivation, incentive-based policy
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