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

Department of Economics, Harvard University, Cambridge, Massachusetts 02138; and Federal Reserve Bank of Boston, Boston, Massachusetts 02210
Graduate School of Business, Columbia University, New York, New York 10027; and Federal Reserve Bank of Boston, Boston, Massachusetts 02210
afuster{at}fas.harvard.edu
sm3087{at}columbia.edu

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.

Key Words: public goods; prosocial behavior; norm enforcement; hidden cost of incentives; experimental economics
History: Received: April 6, 2009; accepted: August 2, 2009.