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Economic Incentives Don’t Always Do What We Want Them To

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Economic Incentives Don’t Always Do What We Want Them To

On their own, markets can’t deliver outcomes that are just, acceptable — or even efficient.

The New York Times,

5 min read
3 take-aways
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Adam Smith may have been wrong – economic interests may not be all that motivates people. 

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Editorial Rating

9

Qualities

  • Controversial
  • Analytical
  • Eye Opening

Recommendation

Self-interest motivates human behavior. It should follow, then, that financial incentives would produce results in the US economy. Not so. Across all strata of American society, such inducements have much less strength than many people believe, yet economists and policy makers still cling to the notion that financial incentives work. Two of the 2019 Nobelists in economics, Esther Duflo and Abhijit Banerjee, argue in this thoughtful analysis that what really matters to people are self-worth, social standing and community ties, factors that leaders should consider in crafting public policy. 

Summary

Economic theory posits that financial inducements motivate human conduct. 

Policy makers have long hewn to the notion that financial rewards inspire individuals’ actions. Indeed, economist Adam Smith held that self-interest compels human actions. 

Yet research has shown that such incentives turn out to be far less effective than expected, and that’s true across a wide swath of socioeconomic groups. The wealthy do not work less hard when top tax rates increase, any more than the indigent do when welfare entitlements rise. A tax code change in Switzerland that resulted in a two-year reprieve from income tax had no effect on the size of the workforce. Similarly, employment in Alaska has not suffered since the 1982 advent of a roughly $...

About the Authors

Esther Duflo and Abhijit Banerjee are economists at MIT. They received the 2019 Nobel Memorial Prize in Economic Sciences.

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