L4: Regulation, Information and Incentives

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Let’s start this lecture using a clip from the 2010 documentary “Freakonomics: The Movie”. In this clip Steven Levitt talks about his daughter, Amanda, and the incentive scheme he used for potty training her. Did this work?

The assumption that all incentives are created equal can lead principals to construct inefficient pay programs that ignore the meaning of the incentives to the targeted agent. In the following video Uri Gneezy explains that traditionally economists focus on extrinsic motivation such as money, while psychologists care more about intrinsic motivation such as job satisfaction. He argues that this separation misses an important interaction effect: the signal sent by the principal in creating the incentives determines the meaning of pay. Considering this signal and its interpretation is crucial in optimizing pay. After discussing ways in which incentives affect intrinsic motivation in either positive or negative way, he draws insights from behavioral economics research to demonstrate how small differences in the structure of such pay programs can change the interaction of intrinsic and extrinsic motivation, and as such greatly impact effectiveness.


Please now answer Assignment 4 based on the reading for this lecture.

Deadline: Wednesday, September 16, at 15:15.

Suggested answers available here after the deadline.

Please connect to my Zoom (link in Absalon) on Wednesday, September 16, at 15:15


I will summarize the main ideas of this lecture and I will asnwer your questions.

After that you will have time to work online with your group. See below.

Group Work: Decision Mapping and Bottlenecks (go to Activity)

Map the decision-making process: think about the different stages that people go through and how people behave. Identify various frictions or points when potential participants drop out. This activity helps you to spot bottlenecksthat might hamper participation and the effect of the intervention. (e.g. is the target population inattentive to program details, or are they overwhelmed by too much information?). See example below.


Together with your group, you have to fill the corresponding cell of this Google Spreadsheet. Deadline: before next lecture.

Summary for this lecture:

  • Regulation (restrictions, bans, laws, etc.) impose behavioral limitations that individuals or firms are expected to comply with. Regulation requires time (create and amend rules) and costly enforcement.
  • Information should reduce or eliminate information asymmetry. However, sometimes people misinterpret or ignore important information (see information avoidance).
  • Incentives are powerful tools to modify behavior. However, their efficacy depends on how they are designed and on their interaction with intrinsic and social motivations.
  • Incentives can be used also to remove barriers that prevent a specific behavior. However, sometimes they may be too high or too low and thus change the perception of a particular situation (signal).
  • Incentives can help people start an activity, build up that habitual stock of behavior, and hence influence long-term behavior. In the same way incentives can also be used to reduce an existing stock of behavior.
  • Incentives can be designed and timed to overcome present bias.  Bundling “should” behavior with a “want” activity could help make the immediate experience of the “should” behavior less painful.

To know more, THE WHY AXIS


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