Understanding the concept of incentives, positive and negative, and how they impact the behavior of people is a core aspect of economics. In fact, economists love to tinker with incentives and identify different measures that can motivate and de-motivate a person from doing an action or from abstaining from it. The power of incentive is such that economists believe that with the right incentive, any person can be compelled to do any task. Incentives can cause tremendous action, inaction or opposition, merely based on the quantity and quality of the incentive.
Every incentive has three flavors to it: economic, social and moral. The case of the childcare centers of Israel will help one understand the impact of incentives, and how a wrongly conceptualized incentive can severely affect the very purpose of the incentive. A study of childcare centers in Israel provided statistics that the parents who came later to collect their children were on an average eight per center, per week. This was an alarming statistic for the centers and they had to spend extra money on holding back staff and paying them for overtime services.
A few economists decided to try a negative incentive by imposing a nominal $3 fine on parents coming late by more than ten minutes, in twenty childcare centers in Israel… The management and the economists believed that this would deter parents from coming late to collect their child. To their utter dismay, within a couple of weeks of the penalty, the number of parents who came late shot up to 20 per week, per center, displaying an astounding increase of 150%. One major factor that one can identify that led to such a drastic increase is the low penalty.
The penalty for the whole month totaled to sixty dollars, which was about 16% of the total monthly service fee per child. From the parent’s perspective, for an addition al 16% of monthly fee, he could come at his own convenience and collect the child. Since, such a penalty was being levied by the childcare center; it became an additional responsibility for the center to provide the best amenities for the child until the parent turned up. It further alleviated the moral conflict within the parent, when he turned up late, as now he could come late and be relieved of the moral binding to come on time, with the penalty.
A similar parallel can be drawn to students who were asked to pay a nominal fee for low attendance. Colleges perceived that by introducing a low penalty for every day of attendance below the stipulated percentage, students would be more regular. To their utter dismay, with the introduction of the penalty, the percentage of students who fell below the required the minimum attendance increased significantly, as they were aware that by paying a nominal penalty they could get away with a few more holidays in the year to enjoy.
On the contrary, in the absence of the penalty the parents had at least a moral obligation to come on time and collect their children. In case a much severe punishment was imposed like a hundred dollars a day, the number of erring parents would significantly reduce. However, that would increase the animosity between the parents and the childcare center management, which could even lead parents to transferring their children to a far less punishing center.
If the childcare centers of the entire region imposed a high penalty for late parents, there is a strong possibility that one of the parents might themselves open a childcare center and compete with the existing one. However, the economists and the management of the childcare centers missed an important perspective. What if instead of punishing the late parents, they provided an incentive for parents who consistently came on time? The incentive can be in two kinds, for the parents and for the children.
A nominal monetary incentive for the parents might simply fail, as again they might want to sacrifice a few dollars a day to enjoy their game of tennis or strive more at work. Hence, if a cash incentive is to be provided, it has to be substantial and there must be an element of scarcity; i. e. the top ten consistent parents being awarded. This would create a competitive spirit in the minds of the parents. It has also to be kept in mind that such an incentive would affect the finances of the childcare centers, and would also be useless if the children coming to the center are from the elite class of society.
The most effective measure to reduce late parents could be achieved by involving the children in the incentive process. By motivating the children to push their parents to come on time and win the best parent award, the childcare center might get its desired benefits, as children are highly competitive and would influence their parents to come on time to pick them up. The childcare center should focus on the children of parents who turn up regularly late to the center, yet create an impression of equality in the minds of the other children too.
Hence, it can be understood from the above discussion that an incentive can have several consequences on its desired participants. An incentive scheme is very successful when the people participate willingly in the process, and reaches less than desired outcome when the participants are forced into the process. A fine example of a forced incentive process is one when a company introduces a new scheme, which has to be promoted by its sales executives, though everyone knows the promotion and the product are unsalable.
An incentive to be successful has to be organic, achievable, realistic and participative. References Donald Edward Campbell (2006), Incentives: motivation and the economics of information, Cambridge University Press Jean-Jacques Laffont, David Martimort (2002), The theory of incentives: the principal-agent model, Princeton University Press Sullivan Arthur; Steven M. Sheffrin (2003), Economics: Principles in action. Pearson Prentice Hall. pp. 31.
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