Reciprocity and Social Norms: Short- and Long-Run Crowding Out Effects of Financial Incentives

Abstract

We link the reciprocity model of Falk and Fischbacher (2006) with the theory of normative social behavior to study how financial incentives crowd out intrinsic motivation in both the short and long runs. Using data from a lab-based repeated public goods game, we find strong evidence in support of the reciprocity model and crowding out effects both when the payment is in place and after it stops. When the payment program is in place, subjects become less sensitive to reciprocity, perceive less kindness in others’ contributions, and care less about others’ welfare. The overall decrease in motivation to reciprocate reduces the effectiveness of the payment program by almost 50%. About 20% of the crowding out effect persists after the payment stops, and the reciprocity mechanism explains over three quarters of the long-run crowding out effect.