Can monetary rewards crowd out (intrinsic) motivation?

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Abstract The Crowding Theory assumes that external monetary rewards may crowd out the intrinsic motivation. The empirical evidence shows that this is possible. The magnitude of the crowding-out effect depends on the form and value of the reward. Very small values produce the strongest crowding-out effect. When high rewards are in place, the relative price effect is typically stronger than the crowding-out effect, unless the value of the reward is too high. Cash payments elicit stronger crowding-out effects than other forms of tangible rewards.Introduction With this paper, I will answer the question whether monetary rewards can crowd-out intrinsic motivation. I will do this with the help of a paper by Frey and DberholzerEee in which they created a framework to test the Crowding Theory. They did this by applying this theory on "Not in my backyard projects" [NIMBYL which are locally unwanted projects that impose net costs on their immediate neighbours, but have an overall positive effect on welfare. They also did an empirical test, which is in this case a siting of two repositories to store nuclear waste. The Crowding Theory Frey and Dberholzer-Gee test says that monetary rewards may crowd out the motivation to do an actiyity or to behave in a certain way for altruistic reasons after such a reward is offered. Economic framework In their framework Frey and Dberholzer-Gee assume that an individual that lives in a community where a NIME'I' project should be realised, chooses the level of support that maximizes his net benefits. The Support consist of all the activities an individual does to support the realisation of the i'llll'v'lE'lr project. The probability of successful realisation depends on the amount of support the project receives. The more support the projects receives the higher is the probability of realisation. The other factors that influence the probability of realisation are the benefits associated with the project the negative externalities the project creates and the monetary compensation one receives in the host community. Two more factors influence the level of support an individual offers. First, the intrinsic motivation that is represented by the benefits if one fulfils their civic-duty and votes in favour of the project. The intrinsic motivation increases with more overall support for the project but decreases when external compensation is offered. which is what the Crowding Theory assumes. The last factor are the costs one has to bear when he participates in activities that support the project. The authors then distinguished between two situations. One situation where no monetary compensation is offered and the expected net benefits are negative and one situation where monetary compensation is offered and therefore the expected net benefits are positive. There are now two possible outcomes for the first situation. Either the benefits one associates with fulfilling his civic-duty are so big that they make up for the negative expected benefits and the costs one has if he participates in any form of support. Then ones level of support would be high enough that he would vote in favour of the project. Or the benefits when fulfilling the civic-duty are not big enough. Then the level of support is too low and one would vote against the project. The second situation now examines what effect the introduction of compensation has on the level of support. The outcome depends on whether external compensation does affect the intrinsic motivation or not. If we assume that the external compensation does not affect the intrinsic motivation, what is assumed in standard economic theory, the level of support one offers would increase. This result is in line with what the relative price effect predicts. If we assume now that the compensation affects the intrinsic motivation, which is what Crowding Theory assumes, the level of support depends on how strong the crowding-out effect is in comparison to the relative price effect. If the crowding-out effect is stronger than the price effect, the level of support one offers decreases, when the external compensation is offered. If the price effect is stronger, then the level of support increases. (Frey & Oberholzer-Gee, 1997) Empirical test To test this economic framework Frey and Oberholzer-Gee used an opportunity in Switzerland where the government planned to build two repositories to store nuclear waste. With the first hypothesis they examined whether introducing monetary compensation would reduce the support for the facilities if the crowding out effect dominates the relative price effect, providing local residents perceive it as their duty to accept this NIMBY project. To test this hypothesis they first asked the respondents (n=305) if they will accept that a facility will be build in their community. Next, they asked the exact same question but offered them monetary compensation in case they accept that a facility will be build. They did this to test if the effect that compensation has on the willingness to accept the facility will decrease. The willingness to accept a facility in their community was 24,6 percent lower when compensation was offered in comparison to when no monetary compensation was offered. The authors also ruled out Strategic Behaviour and Signaling as competing. With hypothesis two and three, the authors further showed that the positive effects, that general support for nuclear technology and the quality of the current siting have on intrinsic motivation fade, when monetary rewards areintroduced. Overall, the results of the empirical test show that monetary rewards can crowd-out intrinsic motivation, but it depends on the magnitude of crowding-out effect and relative price effect. (Frey & Oberholzer-Gee, 1997)Empirical evidence Today there is more research regarding the crowding-out of motivation caused by monetary rewards. In the following; I will present further literature that shows the crowding-out effect. I will mostly focus on studies regarding prosocial behaviour, which is about voluntary contribution to public goods like donations, volunteering or some form of protecting the environment. The reason is the paper by Frey and Uberholzer-Gee {199?} is also about contributing to a public good and this is where intrinsic motivation is most present. In E, Gneezy and Rustichini conducted two experiments; which showed evidence that motivation or in this case effort declined when compensation was offered. The first experiment was an ID. experiment; which required the participants to answer 50 questions. They used four different treatments. Treatment 1 paid zero new Israeli sheitel EMS], treatment 2 [1.1 NIS, treatment 3 one NIS and treatment 4 three NIS for every correct answer. In treatment 1, the average number of correct answers was 23.4 and dropped to 23.0?5 in treatment 2. For treatment 3 and 4; the average numbers of correct answers were 34.? and 34.1 respectively. The second experiment was a donation experiment where high-school students collected money for donations to charities. The student were either promised CHE, 1% or was of the sum they collect. When the students were promised 1% or 10% of the amount they collected, the overall amount was significantly smaller than when [1% was offered and they were just told how important these donations are. However, it is also important to mention that the group that was promised 19%, collected significantly more than the 1% group {Gneezy El. Rustichini, 2909}. Frey and State {1999: came to comparable results when they examined how financial rewards affect the effort that volunteers put in. They split the volunteers into three groups. Cine group was offered no reward, one group a small reward and the last group a high reward. They observed that the group of volunteers that was offered a small monetary reward offered less hours than the group that was offered no reward. The high reward group though offered the most hours {Frey 8.1 Gotte, 1999]. These two studies contribute to fact that motivation crowding-out might happen when monetary rewards are introduced. However, as seen in both studies, higher rewards granted higher outputs than small reward. As we see in these studies, it does not mean that the relative price effect does not work if motivation crowding-out is happening. It just means that monetary incentives may generate more costs than anticipated and that the overall amount of motivation depends on the magnitude of crowding-out effect and relative price effect. Conclusion As the evidence shows, it is clearly possible that monetary rewards can crowd-out intrinsic motivation. This happens as shown in different areas that rely on prosocial behaviour. However, this does not mean that rewards do not work or that the relative price effect has to be questioned. It means that introducing rewards can come with additional costs, which have to be considered. To effectively introduce rewards that elicit a stronger price effect than a crowding-out effect, policymakers should pay attention to the points made in the chapter "Management implications"