Incentives Matter But So Does Context

Economist Steven Landsburg famously claimed that economics can be defined in two words:  “incentives matter.”  For Landsburg, all else is commentary.  In a 2013 book entitled The Why Axis, Uri Gneezy and John List explore in detail how incentives matter.  Characterizing economics as a behavioral science, they seek to understand what affects individual behavior based on exploring various incentives and contexts.  In particular, they use field experiments to illuminate which incentives matter and how through examples drawn from a number of policy areas including child day care, school performance, charitable giving, gender compensation, and health care.

For example, if a day care center doesn’t charge for late pick-up, parents feel an obligation to pick up their child(ren) in a timely fashion.  Once a late charge is introduced, especially if it’s modest, they no longer act as if they are imposing on the center if they are late; thus, they are likely to be late more frequently.

A second example relates to incentives and charitable giving.  Through a variety of experiments, Gneezy and List discovered that a) matching grants encourage giving but that b) the magnitude of the match – 1 to 1, 2 to 1, or 3 to 1 – affects neither the number of contributors nor the amount of contribution.

A third example relates to policy to address discrimination. The authors argue that field experiments can help distinguish between sheer animus (hostility or bias) and economic forces as the central drivers of discrimination by race, gender, age, or knowledge level. Their experiments suggest that financial incentives play a more significant role than bias.

To summarize, Geneezy and List show that a well defined policy objective, an understanding of which incentives matter to people,  and field experiments with subject and control groups to explore the effects of different incentives (both monetary and non-monetary) can help policy makers (whether private or public) design efficient policies to reach their desired objectives. These economists show how the study of incentives through field experiments, and not policies based on ideological preferences, can lead to significant gains in performance no matter  the objective.  Thus, The Why Axis serves as an excellent source for the first blog posting on No Con Economics.

 

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