![]() Though there is a huge and largely unchartered territory of possible circumstances yielding unexpected results, we seek to understand only the most common circumstances which lead financial incentives to produce the opposite of the desired effect. This literature review aims to identify the circumstances under which monetary incentives can lead to decreased effort or worsened performance while exploring the underlying psychological phenomena that lead to these counterintuitive results. A more discriminating analysis is therefore required. Let it be noted that we cannot assume that monetary incentives simply do not work in fact, there is a wide array of evidence supporting the basic premise of economics that incentives, particularly financial ones, are generally effective (e.g., Gibbons (1998), Prendergast (1999), Lazear (2000a,b) and Lee et al. However, much attention has been paid to a narrow and simplified view of human motivation while less research has aimed to understand why offering incentives can sometimes produce seemingly inconsistent outcomes. In the last three decades, economists have made great progress in understanding incentives. ![]() This paper examines when and why pecuniary incentives backfire. Findings like these, where explicit incentives for task performance lead to decreased motivation and reduced long-run performance, have been reported numerous times in psychology literature (e.g., Festinger & Carlsmith (1959), Deci (1972), Deci & Ryan (1985)). Economic theory tells us that the friend should be even more willing to help, since twenty-five cents is better than nothing-a “ higher incentive” that should, in theory, “ lead to higher performance.” In reality, though, it’s hard to imagine that friend would be very pleased with the offer. Now suppose the mover asks their friend to help them move in exchange for payment of a quarter. Suppose someone asks their friend to help them move. However, it’s easy to find exceptions to this seemingly obvious rule. ![]() In other words, the bigger and better the incentive, the more people will be motivated to perform a task (and therefore, their level of effort and performance will likely also increase in response to increased incentives). Standard game theory takes for granted that “ raising monetary incentives increases supply” (Frey & Jegen, 2001) and “ a well-established result of most standard hidden action models is that higher incentives, ceteris paribus, lead to higher performance” (Pokorny, 2006). The list goes on “ incentivizing” a worker has become synonymous with offering payment. ![]() “ Paying for as” is a common practice among parents in many middle and high schools. Teacher’s salaries are often tied to their student’s performance on standardized tests. An offer of a few dollars is the most common way to gain participants in academic research studies. Extrinsic, monetary incentives like small cash payments, bonuses, or performance-related pay are common standbys for motivating or changing the behavior of individuals. Freakonomics, the bestselling book marrying economics and pop culture, goes so far as to define economics as “ the study of incentives” (Levitt & Dubner, 2005). ![]() In the discipline of economics, incentives matter. ![]()
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