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Incentives and social preferences

Incentives are widely and frequently used to influence preferences among people with the aim of achieving some socially beneficial end. These incentives include fines, rewards, and taxes. From the domain of health, Pigouvian taxes on foods deemed unhealthy and pricing schemes for alcohol are examples of such incentives. But, evidence often reveals that these incentives are not having the effect that would be expected from a rational homo economicus; often the effect is smaller than expected and in some cases is the opposite of what is expected. In one well-cited experiment, the imposition of fines on parents arriving late to pick up their children in Haifa, Israel, resulted in double the number of late pick-ups (Gneezy and Rustichini, 2000). Social preferences must be playing a role. In an extensive review of economic experiments, Bowles and Polania-Reyes (2012) examine whether economic incentives and social preferences are substitutes or complements. For policy-makers, the non-separability of incentives and social preferences is important; if incentives act as a substitute for preferences for some socially beneficial end, then their imposition will lead to lower than expected or opposite effects.

To examine how social preferences and incentives interact, Bowles and Polania-Reyes identify two types of preference: state-dependent and endogenous. They distinguish them as follows:

As Italian residents, your authors now eat a lot more pasta than we did in our countries of origin. Abstracting from possible international price differences, this could be another case of “when in Rome, do as the Romans.” Or it might be that we have newly come to enjoy the taste of pasta, perhaps through extensive exposure to it while in Italy. Which case it is—state-dependent or endogenous preferences—would be revealed by what we will eat back in Bogotá or Santa Fe. If we go back to arepas or potatoes, then our taste for pasta was state-dependent. If we remain pastaphiles, then our preferences have endogenously changed.

Extending from this, the authors define mechanisms by which incentives and preferences interact. Under a state-dependent mechanism, the situation, environment, or way (e.g. the state) in which an incentive is administered can alter preferences in three ways:

  • Bad news – the incentive provides information about those administering the incentive (the principal).
  • Moral disengagement – the incentive ‘crowds out’ moral values; in the absence of an incentive individuals rely on moral preferences.
  • Control aversion – Incentives compromise self-determination; people do not like being manipulated and wish to be treated with dignity and autonomy.

All three cases are relevant to health policy, but, perhaps, it is the last that may have the largest effect. There are frequent attempts to provide incentives to manipulate the diet and drinking and smoking habits of individuals. Fast food and fizzy drinks taxes have been proposed frequently (e.g. here and here). A purely rational homo economicus would respond accordingly to these taxes and adjust her preferences in accordance with the differing marginal cost. But, these taxes may be viewed as a dictation of behaviour from a political class without regard or understanding for choices or preferences for those from different backgrounds and the response may be to do exactly the opposite. Similarly, an imposition of a Pigouvian tax may lead to moral disengagement as the tax and market act as a substitute for social responsibility to protect health.

Incentives may alter preference acquisition in the long-term as they influence economic rewards and social status of those with different preferences. The economic structure of a society has been shown to affect parental child rearing values, personality traits, and developmental influences (Bowles, 1998). From a broader, political economic perspective, the economic structure of society also provides the opportunities, objectives and constraints under which state managers operate. They have to balance both trying to improve public health with the necessity for electoral success (other self-interested motives notwithstanding). The economic structure which leads to preferences among the poor for health-related behaviours that generally have a negative aggregate effect on public health is the same economic structure that leads state managers using taxes and fines to both provide incentives to alter health-related preferences but also to shift the burden of the net result of those preferences onto those individuals. But, for the aforementioned reasons, including social position and wealth, these incentives may just replicate the same socioeconomic conditions that may have led to the acquisition of those preferences in the first place.

Incentives could also have a crowding-in effect; amplifying already existing social preferences. However, understanding when this is the case is very difficult ex ante. Bowles and Polania-Reyes conclude their study with the following:

The policy package of which the incentives are part should let the target understand that the desired modification in her actions will serve to implement an outcome that is socially beneficial so that the target is more likely to endorse the purpose of the incentive, rather than being offended by it as either unjust or a threat to her autonomy or in some other way reflecting badly on the intentions of the planner.

What is also clear is that, particularly in the case of health policy, creating a distinction between an economic world and a non-economic social and political world, as is the case in much of neoclassical economics, may serve as a hindrance to understanding and implementing effective policy.


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6 years ago

[…] to understand the implications of sets of complex options. We have also previously discussed the importance of social preferences in decision making. The key point is that, as policy is becoming more and more informed by […]

7 years ago

[…] theoretically speaking. A question that remains in my mind are whether preferences in this case are endogenous or state dependent, a question that has important implications for policy. Similarly, did reunification reveal East […]

Mariano Mamertino (@mmamertino)
10 years ago

Thanks for the article. I think that exploring the interaction between incentives and social preferences, especially for what concerns health behaviors, it’s an interesting and rather challenging exercise.

These days Mexico, among others, is moving forward on taxing soda bottles ( to curb sky-high obesity and diabetes prevalence rates. As the article points out, it is not clear to what kind of outcomes this policy is going to lead. If, as suggested, a “control aversion” effect prevails, the policy may not be so effective after all in lowering consumption levels of high-sugar content sodas.
Given the strong empirical association between SES, income and risky health behaviors (such as alcohol abuse, smoking and unhealthy diets), there are good chances that such a tax will turn out to be markedly regressive. Putting aside our concerns for the actual effectiveness of this kind of policies for a moment, I am wondering whether policy makers are properly taking into account the potentially dangerous side-effects that these policies could have on the distribution of income through a regressive indirect tax.

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