Reactive Incentives: Harnessing the Impact of Sunk Opportunity Costs

40 Pages Posted: 26 Dec 2019 Last revised: 17 Jan 2020

See all articles by Ian Ayres

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Giuseppe Dari‐Mattiacci

University of Amsterdam - University of Amsterdam Faculty of Law

Date Written: December 17, 2019

Abstract

Sunk opportunity costs can causally affect subsequent behavior. Turning down initial temptations might make it easier for people to stay committed in the longer term to a personal goal. We discuss several competing explanations for this enhanced commitment effect – including that resisting temptations might (1)“self-signal” information about individual’s own resolve or (2) create prospective risk of cognitive dissonance. Individuals who are subject to what we call “reactive incentives” have superficial incentives to accept a temptation and deviate from some pre-existing goal. But the process of resisting the temptation may cause these individuals to be less likely to subsequently deviate from that goal. We identify two broad categories of reactive incentives: reactive carrots and reactive sticks.

This article tests the causal impact of reactive incentives in a field experiment at a University of Amsterdam gym where new subscribers were randomly assigned to one of several groups. “Temptation” group members were made one-time monetary offers of varying size to quit the gym. None of the temptation group subjects accepted the offered compensation to quit the gym. Subjects who were offered a moderate reactive carrot (a full refund plus a cash payment equaling 10% of their initial subscription price to quit) were statistically more likely to visit the gym, to resubscribe, and to earn higher post-treatment grades. Even though the foregone financial opportunities are sunk, they nonetheless affect our subjects’ future behavior. Consistent with the reactive stick hypothesis, we also observe that new subscribers who were exposed to unpleasant weather conditions during their first week of membership were more likely to subsequently visit the gym than new subscribers who did not have to initially confront the reactive stick of bad weather.

This article explores a range of settings where policy-makers might deploy reactive incentives to beneficially enhance self-control – including smoking cessation programs, payday lending, college completion and retirement savings.

Suggested Citation

Ayres, Ian and Dari-Mattiacci, Giuseppe, Reactive Incentives: Harnessing the Impact of Sunk Opportunity Costs (December 17, 2019). Columbia Law and Economics Working Paper No. 612 (2019), Available at SSRN: https://ssrn.com/abstract=3509572 or http://dx.doi.org/10.2139/ssrn.3509572

Ian Ayres

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Giuseppe Dari-Mattiacci (Contact Author)

University of Amsterdam - University of Amsterdam Faculty of Law ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

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