Intrinsic and Extrinsic Motivation. Forthcoming in Jürgen Backhaus (ed.) Encyclopedia of Law and Economics

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1 Intrinsic and Extrinsic Motivation Forthcoming in Jürgen Backhaus (ed.) Encyclopedia of Law and Economics Cécile Bazart Université de Montpellier LAMETA Rustam Romaniuc Université de Montpellier LAMETA & Università di Torino IEL Abstract: The question of human motivation is central to understand the effects of legal rules on people s behavior. One of the main tenets of law and economics is that incentive systems need to be designed in order to minimize the difference between private and social interests. Legal rules, taxes, subventions and other external interventions are regarded as necessary to motivate the internalization of externalities. Empirical evidence however suggests that motivation to engage in pro-social behavior may preexist to external incentives. People often avoid cheating, polluting or littering and they act pro-socially without considering consequences of deviation to do so. The traditional idea of laws as price-incentives has a difficult time explaining these phenomena. This is why in the last two decades one of the most promising research agenda consisted in distinguishing between extrinsic and intrinsic motivations. The former are linked to actions driven by external incentives, in contrast to the latter driven by personal and internal forces. Keywords: intrinsic motivation, external incentives, social preferences, self-interest

2 Incentives and motivations Selfish decisions, made by one person, can have very bad consequences for other people and society at large. Law and economics refers to this problem as social costs (Coase 1960) or externalities. Thus it is important to temper individual selfishness to guarantee both: the functioning of the market, which rests on the respect of property rights, and the advancement of social welfare that rides on the provision of public goods. How can we discourage socially costly behaviors and encourage people to contribute time and money to the public interest? This question lies at the heart of the new law and economics (Kornhauser 1988). This strand of literature suggests that law can create material incentives, such as sanctions or rewards, for even the most selfish individuals to think twice before engaging in socially undesirable conduct. For example, tort law creates such external incentives through the determination of damages the injurer has to pay for the harm caused. This should deter potential injurers from harming others. However, the limited and sometimes counter effects of external incentives on prosocial behavior are increasingly pointed out by psychologists (Deci and Flaste 1995) and economists (Frey 1992, 1997a, b). And the notion is gaining popularity within the law and economics community (Bohnet et al. 2001; Bohnet and Cooter 2003; Feldman 2009). The idea is that motivation is in fact dual, composed of an intrinsic element besides an extrinsic one. Intrinsic motivation was originally defined as some inherent interest in a task (Deci 1971). However, it has long since been expanded to include: environmental morale (Frey and Stutzer 2008), civic duty (Frey et al. 1996), fairness and reciprocity (Fehr and Schmidt 1999), and potentially other pro-social unselfish motivations such as conscience (Stout 2011). One of the major insights from this strand of literature is that trying to minimize the difference between individual and social interests by external incentives may actually undermine intrinsic motivation (Gneezy and Rustichini 2000; Bénabou and Tirole 2003). The two types of motivations are effectively interacting to produce the final behavioral response. This is called the inseparability thesis (Bowles 2011). Figure 1 illustrates the relationship among these variables, with the positive and negative signs indicating the direction of the effect.

3 Figure 1: The interactions between external incentives and intrinsic motivation and their effect on pro-social behavior. At the core of the interrelationship between intrinsic and extrinsic motivations are the notions of competence and autonomy (Ryan and Deci 2000, Tirole 2009, Festré and Garrouste 2014). The prescriptive character of rewards and sanctions, such as imposed by the legal system, may indeed undermine people s confidence in their capacities to voluntarily restraint from undesirable conduct (Bénabou and Tirole 2003) and reduce their sense of autonomy by shifting the locus of control from inside to outside the person (Ryan and Deci 2000). Whether this substitution effect exists and to what extent it plays a part in people s reactions to external incentives is a debated empirical question to which we turn next. Empirical tests of motivation crowding (out) Research on the crowding-out effects of extrinsic incentives on people s intrinsic motivations can be divided into two groups. The first group focuses on the effects of rewards and sanctions on people s decision to engage in pro-social behavior. The second strand of literature takes other compliance instruments, which are generally labeled as control strategies, and attempts to shed light on their capacity to encourage desired conduct. The effects of material incentives Contrary to economic theory s postulate that people supply more of a good or service when its price goes up (holding all other prices constant), Titmuss s (1970) empirical investigation of blood donations in the United States of America and Great Britain indicates that paying people in return for their blood might decrease altruistic blood

4 donations. The explanation being that under this monetary incentive donors no longer consider their act as an altruistic blood donation but as an economic transaction. Following this puzzling idea, Frey et al. (1996) designed a field experiment to test the effects of monetary incentives on Swiss households acceptance of a nuclear waste recycling plant in their neighborhood. They found that tangible rewards decrease acceptance due to the crowding-out of public-spirit. Along similar lines, Fehr and Rockenbach (2003) suggest that when people attribute their chosen behavior to external sanctions, they discount any altruistic motivations. Curiously, in their game, the amount of cooperation is higher in the absence of the sanction for non-cooperative behavior. This is congruent with Bohnet et al. s (2001) findings that provisions with respect to contract enforcement may crowd-out trustworthiness and negatively impact performance. In addition, an important aspect of this literature is that external incentives detrimental effects on cooperation are nonmonotonic. In the case of contract enforcement, performance rates are high when the expected cost of breach is sufficiently large, decreasing for medium-size expected sanctions and increasing again for sufficiently small ones. With respect to rewards for performance, there is a discontinuity at the zero payment in the effect of monetary incentives: for all positive but small enough compensations, there is a reduction in performance as compared with the zero compensation, or, better, with the lack of any mention of compensation (Gneezy and Rustichini 2000, p. 802). Another important component of the crowding-out theory suggests that people do not really care about the outcome of a pro-social behavior per se, but instead care about how their behavior is perceived by others they like to be perceived as fair (Andreoni and Bernheim 2009). Their behavior is thus driven by image motivation (Ariely et al. 2009). Within this perspective, extrinsic incentives have a detrimental effect on pro-social behavior due to the crowding-out of image motivation. Finally, Irlenbusch and Sliwka (2005) have shown that once a monetary incentive mechanism is introduced, its detrimental effect persists even after its removal and it spreads out to other areas by altering people s cognition of the situation. The effects of control Another central tenet of economic theory, which is at the core of many law and economics models, is that monitoring improves agents performance. The legal system often specifies in advance what type of conduct is admissible and the conditions under

5 which it may be carried out. However, the postulate that monitoring is always performance enhancing is jeopardized by experimental results. For instance, Falk and Kosfeld (2006) designed a principal-agent game in which the principal could specify in advance a minimum effort requirement for the agent to put in. Curiously, they found that the decision to control significantly reduces the agents willingness to act in the principal s interests (p. 1611). Agents dislike control because it signals principal s distrust in their capacities to perform a task. Agents seem to believe that principals who control expect to receive less than those who don t, and ( ) agents beliefs correlate positively with their behavior (p. 1612). This result is not confined to laboratory experiments. In an econometric study of 116 managers in medium-sized Dutch firms, Barkema (1995) showed that increases in personal control by superiors resulted in a significant reduction in the number of hours worked. Finally, prescribing in detail a particular behavior through ex ante regulations has been found more detrimental than intervening ex post by sanctioning (rewarding) the undesired (desired) conduct. Motivation effects are indeed an important aspect to be considered in the tradeoff between ex ante state control and ex post legal intervention. The legal system is less likely to reduce people s sense of autonomy. References Ariely D, Bracha A, Meier S (2009) Doing good or doing well? Image motivation and monetary incentives in behaving prosocially. American Econ Rev 99: Andreoni J, Bernheim BD (2009) Social image and the norm: A theoretical and experimental analysis of audience effects. Econometrica 77: Barkema HG (1995) Do executives work harder when they are monitored? Kyklos 48: Bénabou R, Tirole J (2003) Intrinsic and extrinsic motivation. Q J of Econ 70: Bohnet I, Frey BS, Huck S (2001) More order with less law: On contract enforcement, trust, and crowding. American Political Science Rev 95: Bohnet I, Cooter R (2003) Expressive law: Framing or equilibrium selection? UC Berkley Pub Law Research Paper No 138 Bowles S (2001) Machiavelli s mistake. Mimeo, Santa Fe Institute Coase RH (1960) The problem of social cost. J Law & Econ 3: 1 44

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