When Extrinsic Incentives Displace Intrinsic Motivation: Designing Legal Carrots and Sticks to Confront the Challenge of Motivational Crowding-Out

The rise of “nudges” has inspired countless efforts to encourage individual choices that maximize personal and collective welfare, with a preference for less restrictive tools such as setting default options or reordering choice sets. As part of this trend, there has been renewed interest in the behavioral impacts of incentives — namely, rewards or penalties for shaping individual choices, including but not limited to financial incentives. Explicit incentives are pervasive in the law, including carrots offered by governments (for example, tax deductions for charitable contributions, rebates for recycling, sentence reductions for prisoners who complete drug rehabilitation programs, and incentives for criminal informants) and statutes or regulations that govern incentives offered by private parties (for example, workplace wellness programs, compensation for blood and organ donation, and pay-for-performance in executive compensation). But despite the intuitive appeal of incentives, legal commentators have expressed increasing alarm about a potential drawback: research in behavioral economics and psychology has come to show many ways in which the use of carrots and sticks may displace other motivations for good behavior, such as altruism, civic duty, or professionalism.

In legal scholarship, prevailing views of motivational crowding-out — the process by which incentives can interfere with “intrinsic” motivations for behavior — suggest that this phenomenon is an irremediable response to incentive-based policies. This Article examines a large but neglected body of empirical and theoretical literature on motivational crowding-out to show that these beliefs may be misguided. Motivational crowding-out is in fact a catch-all term for a diverse set of cognitive and behavioral processes that range from long-term changes in preferences, to the impairment of self-determination, to a complex set of signals that incentives can send to people about their abilities, social environment, values, and employers. Far from being inevitable, motivational crowding-out is responsive to changes in the way we design incentive-based policies. That is, once we understand the mechanisms of crowding-out, we can modify the incentive architecture to either minimize or amplify crowding-out effects. Remedies, however, must be tailored to the diverse causes of crowding-out, and the law has not yet recognized this problem. In light of deep anxieties about motivational crowding-out throughout the law, this Article proposes a taxonomy of crowding-out processes and introduces “incentive architecture:” the deliberate structuring of incentives to address crowding-out effects.