Book review: The Moral Economy

A famous case of incentives going wrong happened in a childcare centre in Haifa, and was reported in this study (ungated here) by Uri Gneezy and Aldo Rustichini (also discussed in Uri Gneezy's book with John List, The Why Axis, which I reviewed here). The problem was that many parents picked up their children late. In the experiment, late parents were made to pay a modest fine for their lateness. This should have created an incentive for parents to pick up their children on time. Instead, it resulted in more late pick-ups.

This incentive failure is one of the motivating examples in Sam Bowles' 2016 book The Moral Economy, which I just finished reading. Bowles draws a distinction between the economic incentives that decision-makers face, and the moral and social norms that have been established. This is not a new distinction. In fact, Steven Levitt and Stephen Dubner drew a distinction between economic incentives (which are predominantly monetary), moral incentives (based on what the decision-maker believes is right and wrong), and social incentives (based on what other people perceive is right and wrong), in their famous book Freakonomics. However, in his book Bowles describes how these different incentives may be at odds with each other. In the case of the Haifa childcare experiment, the economic incentive would have led to fewer late pickups, but it changed the norms of picking up on time, reducing the moral and social incentives against late pickups. The combined result: more late pickups.

Bowles argues that incentives have both direct and indirect effects on behaviour. The direct effect is based on the economic incentive, but the indirect effect works through decision-makers experienced values or social preferences. Sometimes, there is no indirect effect. The economic incentive and social preferences are independent of each other. Bowles refers to this as separability. However, when there is an indirect effect of the economic incentive on social preferences, and:

When the indirect effect is negative, meaning that the total effect falls short of the direct effect, then incentives and social preferences are substitutes (or are "sub-additive" or are said to exhibit "negative synergy" or "crowding out")...

Where the indirect effect is negative and large enough to offset the direct effect of the incentive, we have the attention-riveting cases in which incentives backfire, that is, they have the opposite of the intended effect, which I term "strong crowding out"...

Where the indirect effect is positive, we have crowding in, that is, synergy between the two effects: then incentives and social preferences are complements rather than substitutes, and are sometimes termed "superadditive".

A good portion of the middle of the book is devoted to outlining a number of experimental (both lab experiments and field experiments) studies that illustrate these four effects. Bowles also distinguishes between marginal crowding out (where the economic incentive has an indirect effect, and the size of the indirect effect scales with the size of the incentive) and categorical crowding out (where an indirect effect occurs just because the economic incentive exists, regardless of the size of the economic incentive). A combination of both marginal and categorical crowding out is possible, as are marginal and categorical crowding in.

If all of that sounds very complicated, you are not wrong. Bowles does his best to make the book interesting and engaging, but the underlying material is quite technical (albeit not particularly mathematical), and so the key messages from the book are likely to pass by the general reader. Economists will be more likely to understand the material, but perhaps less likely to fully accept what they mean for incentives.

My takeaways from the book were that economic incentives may erode social motivations, and that means that economic incentives may not be as effective as we think they are, and in fact in some circumstances may have the opposite of the intended effect. Of course, these are not new conclusions, as Gneezy's study (and others) have highlighted this much earlier. This book simply compiles more of the evidence in one place, and provides a framework for understanding it.

Where the book falls short, though, is the policy prescription. If incentives don't work as well as intended, or may have the opposite of the intended effect, can policy-makers (or others) determine in advance what the effects will be? How can we know the circumstances under which economic incentives will crowd out social preferences, and especially how can we know if the economic incentives will be counter-productive? Here, the framework itself is little help, and unfortunately, Bowles has little guidance. In the conclusion, he writes that:

I do not know whether an approach to constitutions, incentives and sanctions adequate to this challenge can be developed. But we have little choice but to try.

That may be a fair assessment, but is a bit of a let-down. Hopefully though, this indicates the start of a programme of research by others following in Bowles' footsteps, to provide more guidance on how incentives fail. Those current and future researchers may be the best audience for this book.