Discussion Paper Details

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Title: Psychological Foundations of Incentives

Author(s): Armin Falk and Ernst Fehr

Publication Date: January 2002

Keyword(s): contracts, incentives, intrinsic motivation, reciprocity, social approval and social norms

Programme Area(s): Industrial Organization and Labour Economics

Abstract: During the last two decades economists have made much progress in understanding incentives, contracts and organizations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this Paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.

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Bibliographic Reference

Falk, A and Fehr, E. 2002. 'Psychological Foundations of Incentives'. London, Centre for Economic Policy Research.