Crowding Out

Imagine that from a young age, your passion has always been writing. You start a blog for fun and volunteer to write articles for your college newsletter. The more you write, the more people start to notice, and eventually, you’re contacted by a local magazine for a job opportunity. Initially, you think that getting paid for something you already love to do will be great, but soon after starting, you find that your motivation to write lessens. You stop writing for fun and don’t enjoy writing the magazine articles either.

The reason that you find yourself less motivated to write is because of the crowding out effect, also known as the overjustification effect. Crowding out suggests that when we are promised a reward for completing an activity, we lose an intrinsic desire to perform that task. As a result, we are less likely to engage in that activity. The supply of behavior is crowded out by the external reward.

Intrinsic: a type of motivation that comes from within. Engaging in an activity because it is intrinsically valuable means that you engage in it because of enjoyment and personal satisfaction.²

Extrinsic: a type of motivation that arises because you are being promised an external reward or benefit for engaging in an activity. Instead of engaging in the behavior because you enjoy it, you do it to get money or another form of external reward.²

Incentivization: attaching a reward to an activity in order to promote it, or attaching a punishment to a behavior to dissuade people from that behavior. Incentivization was thought to be effective according to operant conditioning,

Operant Conditioning: a method of learning which suggests that when rewards are offered for performing a behavior, people create an association between the behavior and the reward and are more likely to engage in them later on and more often as a result.³

Altruism: engaging in behavior out of a desire to help other people. It is considered an intrinsic form of motivation, because one engages in it without obligation or need of a reward.

Relative-Price Effect: a theory in traditional economics that suggests that the higher the reward for an activity, the more often and intensely people will perform that activity.⁴

In 1970, Richard Titmuss — a pioneer of social policy and influential British social researcher — first proposed that external rewards might negatively influence action or participation.⁵ In his book The Gift Relationship, Titmuss suggested that trying to get more blood donations through the promise of a monetary reward might actually dissuade people from donating blood. Titmuss compared social policies in two different countries, England and America, to come up with his hypothesis. He noted that in America, blood is treated as a commodity, as for-profit organizations were in charge of donations. Alternatively, in England, the medical system relied on altruism and people volunteering to give blood without any extrinsic motivation.⁶ 

Titmuss suggested England had a system that would lead to a greater supply of blood, a hypothesis that was met with a lot of skepticism at the time.⁵ Up until this point, most policy makers and economists believed in the effectiveness of monetary incentives, as traditional economics suggests that people will always make decisions that will maximize utility (e.g. benefit them the most economically). Because Titmuss did not have a well-formed analytical framework nor enough empirical evidence for his hypothesis, his hypothesis did not gain a lot of traction in the 1970s.⁷

Although Titmuss first started speculating on the subject of crowding out, it wasn’t until 20 years later, in 1997, that the term was coined by Swiss economist Bruno Frey. In his paper “The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out,” Frey revisited Titmuss’s theory and attempted to provide the applied evidence that had been missing. Frey suggested that if someone usually performs an action out of altruism, an intrinsic motivation, then paying them for that behavior will prevent them from being able to act altruistically, and their motivation will diminish. He termed this phenomena crowding out, as supply is being crowded out by external rewards.⁷

To test his theory, Frey examined the impact of monetary rewards on “Not In My Backyard” (NIMBY) movements. The NIMBY movement describes instances when residents of a neighborhood oppose a new project in their neighborhood, such as affordable housing or a shelter.⁸ While these projects are often beneficial for overall social wellbeing, they can impose costs on the neighborhood. According to economic theory, residents can be appeased by compensating them with a monetary reward in return for their approval to have the project located in their neighborhood. This notion that more compensation would lead to more supply (more residents accepting the project) is known as the relative price effect.⁴

Frey tested this theory by asking residents in two different communities in Switzerland whether they were willing to permit the construction of a nuclear waste repository in their community, a project that would present minor chances of radioactive side effects. The study showed that residents who were not offered any financial reward were roughly twice as likely to vote in favor of the project as those who were told they would get monetary compensation. Frey concluded that many people were rejecting the project precisely because of the monetary compensation, as they no longer felt intrinsically motivated to accept costs for the greater good of society.⁴

Frey’s empirical evidence poked holes in traditional economic theory and opened up space for behavioral economics, which takes into consideration factors outside of utility maximization like emotions and cognitive biases, to gain traction. Economic motivation underwent a paradigm shift, and it is now widely accepted that external rewards can have negative effects on supply or participation.⁹

While operant conditioning and the relative-price effect assumes that attaching a reward to a behavior will increase the frequency of that behavior, crowding out demonstrates that in some cases, the opposite effect will occur. This is especially important for institutions such as the government that rely on citizens' behaviour to reach a common social goal. For example, hospitals depend on blood donors, senior citizens rely on younger individuals to get the flu shot and achieve herd immunity, governments need residents to support new projects, and non-profit organizations hope for monetary donations.

It might seem logical that providing people with a reward will entice them to be good samaritans, but according to the crowding out effect, we instead should be highlighting and encouraging people’s altruistic tendencies. Rewards can cause people to feel forced to do something, and most people don’t like being told what to do. When left to their own devices, individuals are more likely to engage in the behavior that benefits society purely out of a desire to help, not an ulterior motive.

Crowding out is also important for the educational sector. It can be difficult to get children excited about school and studying. It might be tempting for parents to offer their kids a reward — like ice cream or a five-dollar bill — for doing their homework. However, providing an external reward might diminish their intrinsic motivation. According to the theory, parents and teachers should instead focus on cultivating their children’s intrinsic motivation and teaching them to find value in the task for its own sake.

Crowding out does not seem like a rational response to being offered money for a behavior —  why wouldn’t we prefer to gain something for an activity? While the effect is observed, it can be difficult to explain why it happens, since it seems like it does not benefit the individual to reject a reward.

Although there are many studies that reveal the crowding out effect, there are also a number of studies that support the relative-price effect and operant conditioning. According to the behavioral perspective, all behavior is actually a reflection of acquired conditioning.

It is also important to note in which situations the crowding out effect occurs. According to the study conducted by Lepper, Greene and Nisbett, it was only when children knew prior to drawing that they’d receive a reward that they later became less motivated to draw for its own sake. One group of children were given a ribbon after they completed the task, and this reward did not seem to impact their intrinsic motivation to draw afterwards.¹⁰ These findings suggest that unexpected rewards might not lead to crowding out.

Whether a reward is given for the performance or completion of a task impacts the presence of crowding out. Psychologist Dr. Robert Einsenberg found that offering children rewards for performing well, not just for performing, actually increased the quality of their performance.¹⁰ This study supports operant conditioning as it suggests that when a reward is tied to one’s effort or success, it acts as a reinforcement of that skill and motivates them to continue to do well. Therefore, while it might not be a good idea to give a child a reward for completing their homework, it might help to give them a reward if they get an A on a test.

There is also evidence that crowding out only occurs when someone already has intrinsic motivation to perform the task at hand. If they do not, they might benefit from a supplement external reward. For example, while someone who already donates blood regularly is intrinsically motivated by altruism, the hospital might be able to reach individuals who do not feel that intrinsic motivation through the promise of a reward.

Don’t Give Thanks With a Gift!

Non-profit organizations and charities do not give people monetary rewards for donating, but some still try to provide some kind of reward or thank-you gift to make donors feel appreciated. However, thank you gifts, as a form of external motivation, can still crowd out intrinsic motivation and make people less likely to donate again.

Assistant Professor of Economics Matthew Chao conducted a study that examined the impact of thank-you gifts on donation incentives.¹² Chao partnered with a public radio station as it was rolling out a monthly membership renewal campaign. Participants received a solicitation member asking them to renew their membership and continue donating so that the radio could continue providing their service. Half the participants were in the thank-you gift group. Of those participants, half were in the ‘swag’ condition, and half were in the ‘meals’ condition. In the swag condition, the participants’ solicitation letter came with an advertisement that said they could receive an optional thank-you gift (a tumbler) if they donated $180 to the radio. In the meals condition, participants’ solicitation letter came with an advertisement that said the radio would donate 60 meals to the local food bank as a thank-you if they donated $180.

Chao found that for both the swag and the meals conditions, donations significantly decreased. He posited that it was because the thank-you advertisements crowded out people’s altruism and intrinsic motivation, even though one of the gift options was a charitable donation. From this experiment, Chao concluded that it does not matter what the thank you gift is; any thank you gift will result in crowding out.¹²

Should We Pay Students to Go to School?

It can be difficult as a teen to remain motivated to go to school. While some students might drop out of school because of financial barriers, low grades, or because they are disappointed with the education system, many drop out simply because of a lack of motivation. In this article, our writer Tony Jiang examines whether paying students to go to school would help prevent the high dropout rate in the U.S. as it has done in other countries, or whether the crowding out effect would occur.

Routine in Quarantine: The Upside of a Pandemic

Another reason why people might lose intrinsic motivation to complete a task is because it becomes a habit. When something is habitual, we aren’t focused on the reasons behind why we are performing the task. However, habits are also familiar and comfortable. In this article, our writer Jeremy Koloski examines how routine - especially during lockdown - can have both positive and negative impacts.

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