What are Incentives?
Incentives are rewards or penalties designed to motivate specific behaviors. In behavioral economics, the key insight is that incentives do not always work as intended: they can crowd out intrinsic motivation, backfire through reactance, or shift behavior in unintended directions.
How it works
A classic example comes from an Israeli daycare study by Gneezy and Rustichini (2000). When a fine was introduced for parents who picked up children late, late pickups actually increased. The fine transformed a social obligation into a market transaction, effectively giving parents permission to be late as long as they paid.
Applied example
A blood bank that pays donors instead of relying on altruism may collect fewer donations, because the payment signals that giving blood is a market exchange rather than a generous act, reducing the social motivation to participate.
Why it matters
The lesson is that incentive design must account for the psychological meaning of rewards, not just their economic value. The wrong incentive can undermine the very behavior it aims to encourage.
