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Having recently read Freakonomics I was particularly interested by the idea of the responses of a community to incentives - as an example, the tale of a school which tried to introduce a financial penalty for picking up children late, which inadvertently had the opposite effect, as it nullified the previously existing (but largely invisible) social penalty.

Is there a general theory for this kind of interaction of incentives with community? If so, what is its name, and where could I read more about it? I'm interested in books and papers on a variety of levels, from popular accounts (à la Freakonomics) to textbooks to research papers.

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migrated from economics.stackexchange.com May 1 '12 at 12:58

This question came from our site for professional and academic economists and analysts.

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This is pretty much all economics. Just depends on the scope of your community (localized, national, firms, individuals, etc.), and the incentives (prices, taxes, interest rates, punishments, etc.). I suspect what you're looking for would be contained in the broadly-defined category of applied microeconomics, but unless you can better articulate what exactly it is that you want, I'm not sure how much help anyone can be. –  prototoast Mar 25 '12 at 16:21
    
@prototoast, yes. And you could throw in parts of sociology and political science as well. –  Michael Bishop Apr 25 '12 at 16:49
    
If you haven't run across them already, I'd recommend books by Malcolm Gladwell, particularly The Tipping Point. It has a competing explanation for the crime drop (less graffiti), though personally I found the Steve's argument more convincing (more abortions). –  BobStein-VisiBone Mar 31 '13 at 18:05

3 Answers 3

Game Theory has principles to contribute, such as the Nash Equilibrium.

A set of strategies is a Nash equilibrium if each represents a best response to the other strategies. So, if all the players are playing the strategies in a Nash equilibrium, they have no unilateral incentive to deviate, since their strategy is the best they can do given what others are doing.

Change the incentives in a community, and it can be expected to migrate from one Nash Equilibrium to another. This would attempt to account for the knock-on or ripple effects, e.g. late pick-up fee makes parents less respectful of the teachers who have to stay late, and resentful teachers make students more cynical, etc.

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I suspect economics is not the best framework for this because financial incentives are actually very limited in their efficacy in real-world contexts. The example in the question is a good demonstration: the financial incentive was a lot weaker than the social incentive it replaced. Applied Psychology might be a better place to look, in part because it requires a more or less explicit theory of decision-making and behavior change.

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Economics does not imply financial incentives only. –  b70568b5 May 7 at 0:46

There is a specific field of economics that deals with the process of changing people's responses through incentives: Behavioural Economics.

study the effects of social, cognitive and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns and the resource allocation.

A recent issue of The Economist covers some of the current approaches used by governments to change individual behaviour:

Behavioural economists have found that all sorts of psychological or neurological biases cause people to make choices that seem contrary to their best interests. The idea of nudging is based on research that shows it is possible to steer people towards better decisions by presenting choices in different ways.

Some of the approaches, for instance used by the British Behavioural Insights Team, are merely ways of changing a message:

The Nudge Unit has been running dozens of experiments and the early results have been promising*. In one trial, a letter sent to non-payers of vehicle taxes was changed to use plainer English, along the line of “pay your tax or lose your car”. In some cases the letter was further personalised by including a photo of the car in question. The rewritten letter alone doubled the number of people paying the tax; the rewrite with the photo tripled it.

It's become a very fruitful area of research so would recommend taking your interest further.

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