Moral vs. Monetary Incentives

A few people that (thankfully) actually read what I write have asked why I specifically mention the potential effects of "insultingly small" monetary incentives. In general, I make the point that a small monetary incentive can crowd out an intrinsic moral incentive. I am careful to limit this assertion to small incentives, since economic research has shown this to be empirically true only on a small scale. This doesn't mean that there is evidence that a large monetary incentive doesn't crowd out a moral incentive, it just means that the large incentives haven't been tested, probably due to resource (or fairness) constraints. Consider the following example:

Gneezy and Rustichini (2000, JLS) performed a field experiment with 10 day care centers in Haifa, Israel. These day care centers were having problems with parents picking up their children late, which (to me at least) is not surprising since there was no specific penalty for doing so. In order to combat this problem, the day care centers instituted a fine of 10 Shekels per child if a parent arrived more than 10 minutes late. Economic theory would obviously suggest that, since the price of picking up a child late has increased, there would be less of that activity. However, what the researchers saw was that more, rather than fewer, parents started picking up their children late. It is also important to note that this higher level of tardiness persisted even after the fine was taken away (at least for the period that the researchers observed.) The authors of the study make the claim that this evidence is consistent with the crowding-out of the original moral incentive.

The authors of this study are careful to point out that the fine is "relatively small but not insignificant". They go on to mention, for example, that an illegal parking fine is 75 Shekels, and the failure to pick up dog droppings results in a fine of 360 Shekels. (I know, I know, I just coldn't resist adding that one in.) Furthermore, a baby-sitter earns between 15 and 20 Shekels per hour. My hypothesis is that the economically expected behavior would have been observed had the fine been larger. The parents likely took the fine as an approximation of the inconvenience to the teachers, and may have realized that they were previously overestimating the inconvenience to others.

As a side note, I really like the signs in Vermont that say "DUI: You Can't Afford It". Most states post signs giving specific dollar amounts for various offenses, but I think that the fear of the unknown is a much better incentive, if for no other reason than it prevents people from making an explicit cost/benefit comparison.

For a more thorough treatment of the crowding out effect, see here. (Note that the authors of this site describe a "significant monetary fine" in the day care example, which I feel implies the fine to be larger than it actually is.)

Why all the fuss about teacher incentives?

There is yet another article about merit-based pay for teachers in today's NYT (Titled "Long Reviled, Merit Pay Gains Among Teachers" if you are so interested). As an economist who likes to read about incentives, I really don't understand why people are so opposed to these ideas. (Full disclosure: both of my parents are high school teachers.) Okay, maybe I do understand, I just don't agree with those people. It seems to me that there are two different types of incentives being considered- the first being a traditional merit-based pay system, and the second being a form of compensation for doing a job that others don't want to do. From an economic perspective, the latter type of incentive promotes labor force sorting and efficiency (the technical term is compensating differentials, and explains for example why garbage men make more money than others with comparable levels of education and skill).

Think about the following situation: there is an overall pool of teachers of varying abilities and subject knowledge. If we consider these teachers to all be part of the same supply of labor (and hence with the same wage for a given level of tenure and education), then basically what will happen is that the most able teachers will be able to get the cushiest jobs in the easiest subjects in the best schools, since they will likely be the ones with the best resumes and the most impressive interviews. This of course assumes that all teachers want these "best" jobs- there may be some quite good teachers that are specfically looking for a challenge, but I would bet that that is the exception, not the rule. Therefore, what ends up happening is that the less appealing schools and subjects get lower quality teachers, since they get what is left over once the better teachers have accepted positions. This problem is even worsened when the "better" school districts can afford to pay more money for teachers (think Scarsdale, NY and their $90K teachers). Presumably this is not what policy makers want to have happen. If they instead want the mix of teachers to be roughly equivalent across schools and subjects (and perhaps even have the "worse" schools and subjects have better educators), then they have to provide a mechanism for shifting the preferences of teachers. The most straightforward mechanism is a monetary incentive scheme, and it is easy to see why this works. While teachers would likely agree about which schools (and perhaps even subjects) are better, they likely differ in their assessments of "how much better". In other words, the teachers differ in how much they must be compensated to go to a worse school or teach a worse subject. Now let's consider an incentive of $10K per year to go teach drafting in an inner-city school. (This could be accomplished either by raising the drafting wage, lowering the non-drafting wage, or a combination fo the two.) Those good teachers that place a high value on teaching English Lit at a grade-A school would not consider this incentive enough to change their preferences, but the incentive would change the preferences of those who were less insensitive to subject or location- they would gladly take the money in exchange for the more difficult school and subject. Now we have at least some good teachers at both types of school in different subjects, which is what we were looking for. (I am not ignoring the point that an English Lit teacher can't just go and teach drafting, but the incentives not only work to alter the choices of current teachers, they also serve to influence the choice to become qualified to teach drafting in the first place. This is a concept often overlooked with incentives.)

Hopefully the argument makes sense up to this point. So why is there all the fuss, even on this issue? One explanation is that this sort of incentive is socially unacceptable. Teaching has long been seen as a "calling", and thus it is considered a bit uncouth to care about monetary compensation too much. Furthermore, well-meaning programs like Teach for America have served to strengthen this idea, almost likening the teaching profession to a volunteer position with the Peace Corps or something. I think this is a mistake that needs to be corrected- teachers are educated professionals with a specific job to do and they should be treated as such, both in terms of compensation and working conditions. The "teaching as a calling" argument largely serves to justify low wages for a very skilled group of people and potentially makes people feel guilty about leaving the profession, or guilts them into entering the profession in the first place. That said, there is a moral incentive at play here, and economists have shown in some cases that a small monetary incentive actually decreases performance due to the crowding out of the moral incentive. My solution? Don't make the monetary incentive insultingly small. :)

I will come back later and talk about the Pay for Performance issue, since I think that there is much to be said on that front as well.