Renewal 20.2-3

The basic idea that rewards, and in particular monetary rewards, may crowd out intrinsic motivation emanates from two quite different branches of literature in the social sciences. In his book The Gift Relationship, Richard Titmuss (1970) argued that paying for blood undermines cherished social values and would therefore reduce or totally eliminate people’s willingness to donate blood. However, he was unable to come up with any serious empirical evidence. A second strand of literature stems from psychology. A group of cognitive social psychologists identified that, under particular conditions, monetary (external) rewards undermine intrinsic motivation (Deci, 1971; Deci and Ryan, 1985; Deci with Flaste, 1995). People have intrinsic motivation when they just like to act in a certain way or because they have internalised social norms. Providing monetary rewards for undertaking an activity may have the negative consequence that people reduce their work effort. The theories on intrinsic motivation emanating from social psychology have in the meantime been integrated into economic theory (Frey, 1992). Arguably, this ‘crowding-out effect’ is one of the most important anomalies in economics. It suggests the opposite of the most fundamental economic ‘law’ stipulating that raising monetary incentives increases supply of effort. If the crowding-out effect holds, raising monetary incentives reduces, rather than increases, this supply. Under certain circumstances, it is therefore not advisable to use the price mechanism to elicit a higher supply. Moreover, one should rely on a quite different type of incentive, namely intrinsic motivation. This article discusses the crowding-out effect and its correlate, the ‘crowding-in effect’, with special regard to its empirical validity. It is demonstrated that these effects are empirically well-founded and have been observed in many different and important areas of the economy and society.