Application Exercise 2e: Child care and incentives
- An incentive is anything that motivates an economic agent (e.g. a consumer or business) to behave in a particular way.
- An extrinsic incentive is external to an economic agent and includes things such as cash rewards, bonuses, profits and fines. It also encompasses non-monetary incentives, such as peer recognition or disapproval, social status, power or even the threat of incarceration. On the other hand, intrinsic incentives are internal to the economic agent. For example, getting satisfaction from the work one does or the “warm inner glow” from making a positive difference to society, perhaps through volunteering or participating in civic life.
- The introduction of fines for tardiness in childcare centres in Haifa meant that parents did not feel guilty about picking up their children late. Their consciences were clear as the fine they had to pay made-up for their lateness.
- Incentives can sometimes yield unexpected results. The introduction of laws mandating the wearing of seat belts in the United States led to drivers driving less safely, a phenomenon known as the ‘Peltzman effect’. The heightened sense of security engendered by a seat belt unexpectedly led to more risk taking and reckless driving on US roads. This is an example of moral hazard and the perverse nature of some incentives.