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

Andreas Fuster, Stephan Meier

Publication type: Journal article

Research Archive Topic: Business Economics and Public Policy, Corporate Finance

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.
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Citation

Fuster, Andreas, and Stephan Meier. "Another Hidden Cost of Incentives: The Detrimental Effect on Norm Enforcement." Management Science 56, no. 1 (January 2010): 57-70.


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