People are motivated by many things. Contributing to environmental goods and services therefore involves a range of motivations. Economic and psychological studies are beginning to shed light on how and why such decisions are made. People may be motivated by deeply held values, they may feel good about helping the environment, they may think it is only fair that they do their bit, they may be seeking approval from others, or to encourage others to contribute themselves. These are all considered intrinsic motivations that are they are largely derived from internal values and preferences. By contrast, extrinsic incentives are provided by others, such as markets or governments.
For public goods, which include many environmental goods, extrinsic incentives are often lacking, due in part to the absence of property rights and markets. In some instances, intrinsic motivations by themselves may be sufficient to achieve a desired outcome. For instance in Australia voluntary blood donations are generally sufficient to meet demand without the need for any formal incentive scheme. However in many cases intrinsically motivated voluntary contributions are not sufficient to supply efficient quantities of public goods. Policies are required to address these inefficiencies. Policies typically focus on providing extrinsic incentives. These can be in the form of payments for extra supply, or sanctions for not contributing. All things being equal, providing additional incentives should increase people’s motivation to contribute to environmental goods and services. However in human decision making, where economics meets psychology, and biology meets social science, all things are not necessarily equal.
Psychology suggests that people are intrinsically motivated when performing an activity improves their self image and gives them a sense of autonomy. This can potentially be undermined by extrinsic incentives. If somebody is being paid to do something, they are less likely to enjoy doing it than if they weren’t being paid. They may also feel that they are doing it just for the money, rather than any “warm glow” they may get for helping the community or the environment, or just from doing a job well. And they may feel that they are being controlled by the money, rather than doing it for their own reasons. Similarly a threat of sanctions may also undermine any enjoyment, warm glow or sense of autonomy.
Therefore there is the potential that some incentives may undermine intrinsic motivations. This is particularly likely if people feel that they are being controlled, and that their voluntary efforts are going unrecognized.
This is termed crowding out – the extrinsic incentives can crowd out existing intrinsic motivations. Even if the extrinsic incentive scheme is itself effective, it may achieve less than anticipated if it reduces intrinsic motivations. Conversely, incentives may crowd in, or reinforce, intrinsic motivation if they recognize and acknowledge effort without being perceived as controlling.
Crowding can be more easily understood by imagining an example. Cooking dinner for a friend is likely to involve a range of intrinsic motivations and no formal incentives. Personally I am likely to benefit when a friend cooks dinner for me, and I may wish it happened more often. As an economist I may consider that the way to increase the supply of dinners is to increase the price, and so next time I might offer my host Rs.100. Of course this is unlikely to work. By introducing the formal incentive, I am crowding out the sense of enjoyment and warm glow that my dinner host had, and perhaps implying that I control them, by requiring them to cook dinner when I pay for it. Since Rs.100 is unlikely to be sufficient payment for an evening’s work, I would not be invited back. If I paid Rs.1000 I perhaps would be; while my friend may no longer enjoy cooking for me, the money may be sufficient to make it worthwhile.
As a policymaker I may instead look for incentives that acknowledge and reward their effort, without being perceived as controlling. For instance I may buy flowers or chocolates, or send a card – this has the potential to crowd in rather than crowd out intrinsic motivations, hopefully leading to more dinners. If intrinsic motivations are initially less important, then crowding out is much less of a problem. Paying an extra Rs.100 in a restaurant is likely to result in a significantly better dinner; buying flowers would probably be less effective.
Clearly there are some instances where crowding out intrinsic motivations can have negative consequences. Intrinsic motivations have been shown to be important in such areas as tax compliance, employment, and volunteer work effort. They are also likely to be significant in environmental management. How can we ever know whether to bring flowers, or offer cash? Many of the lessons of incentive design have been learned through trial and error, which can be a costly and socially damaging process. An alternative is to use controlled experiments to examine how incentives and motivations might interact.
Experiments are increasingly being used to incorporate the social and psychological aspects of human decision making into economic theory. Economic experiments typically involve observing how people respond to simulated markets and institutions.
The setting can be controlled by the experimenter, enabling alternative policies to be tested and compared. Subjects are paid based on the decisions they make, so observed behavior is real rather than hypothetical. Experiments can serve as a ‘wind tunnel’ to gather empirical data on how people respond to proposed market structures, incentives and policies.
We have used experimental economics to examine how intrinsic and extrinsic motivations might interact. We created a scenario in which people had to trade-off narrow self interest against the public good. The optimal outcome for the group occurs if everyone contributes to the public good; however each individual has an incentive to free ride – by not contributing they increase their private income, but at a greater cost to the group. This reflects the dilemmas faced by many decision makers. For instance in a salinity threatened area, a farmer may benefit the group (i.e. all farmers in that area) by reducing irrigation, but at a personal cost in terms of foregone production.
In our experimental scenario, we found that many people were prepared to make voluntary contributions to the public good, even though it was costly for them to do so. There was much variation among individuals – some made large contributions, some less and some contributed nothing. Introducing a regulation specifying a minimum level of contribution led, unsurprisingly, to an increase in total contributions. However if that regulation was subsequently revoked, contributions declined sharply, and were significantly below the levels seen before the regulation was introduced. One explanation for this is that being regulated has crowded out some people’s intrinsic motivations to contribute.