The Hindu Business Line : Economics of incentives

MY FRIEND and his wife sometimes keep long working hours. They have found a way to work around their guilt of not spending enough time with their daughter. They buy her expensive gifts whenever they come very late. The child seems happy and the parents, less guilty. So, what has this behaviour got to do with economics?

Economics is about incentives, which is a means of encouraging people to do more of good things or less of bad things.

Suppose your company has a policy to terminate employment if a worker violates the ban on cigarette smoking in the factory premises. Workers have an economic incentive (termination) not to smoke.

If you are against child labour and a cigarette company employs children in their factory, there is a moral incentive not to smoke that brand.

My friend and his wife were substituting moral incentive with economic incentive. How? Guilt acts as a moral incentive, forcing working parents to spend more time with their children. Buying expensive gifts is the economic incentive that such parents use to wash away their guilt.

This behaviour is not new. Economists conducted an experiment in a day-care centre to understand how people react to incentives. The centre started levying a fine on parents who came late to collect their children. Soon, more parents began arriving late! Why? The parents thought that it was alright to come late, as they were paying a fine, substituting moral incentive with economic incentive. Interestingly, the number of latecomers did not reduce even after the penalty was withdrawn.

Clearly, levying fine does not always work for the better. You can read this and other such freaky economic behaviour in the excellent book, Freakonomics: A rogue economist explores the hidden side of everything.

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