Behavioural economics has blossomed in recent years, to the point that the Fall 2011 edition of the Journal of Economic Perspectives can, along with articles on neuronomics, genetics and retirement, include a fascinating 20 page review paper on incentives. That's not surprising; a lot of people have taken an interest in them lately, including President Obama and Britain's prime minister.
When and Why Incentives (Don’t) Work to Modify Behavior was written by Uri Gneezy from the University of California–San Diego, Stephan Meier from Columbia Business School, and Pedro Rey-Biel at the Universitat Autònoma de Barcelona. It discusses when extrinsic incentives are more or less likely to alter behaviors in the desired directions, focussing on incentives in education, incentives for 'pro-social' behaviour, and incentives and lifestyle habits. They argue that although "incentives to modify behavior can in some cases be cost effective", there is also a danger that direct extrinsic motivations might 'crowd out' intrinsic motivations. For example:
...an incentive for a child to learn to read might achieve that goal in the short term, but then be counterproductive as an incentive for students to enjoy reading and seek it out over their lifetimes.
The authors conclude:
Our message is that when economists discuss incentives, they should broaden their focus. A considerable and growing body of evidence suggests that the effects of incentives depend on how they are designed, the form in which they are given (especially monetary or nonmonetary), how they interact with intrinsic motivations and social motivations, and what happens after they are withdrawn. Incentives do matter, but in various and sometimes unexpected ways.
To paraphrase Sergeant Esterhaus: Choice architects, let's be be careful out there!