The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out

Twenty-six years ago, Richard M. Titmuss (1970) claimed that monetary compensation tends to undermine an individual’s sense of civic duty. He illustrated his claim with blood donations, contending that paying donors negatively affects their willingness to donate blood. This thesis attracted considerable attention. Among others, Robert S. Solow (1971) and Kenneth J. Arrow (1972) discussed the proposition, both assuming that the effects of price incentives can simply be addedto those of altruistic donation. Contrary to Titmuss, economists therefore generally predicted that if the price of bloodis raised, the total quantity offered would increase in accordance with a normal supply function of blood. This discussion subsided rather quickly because there was neither an analytical framework nor convincing empirical evidence to support Titmuss’s case. Today, new theoretical developments suggest that economists should considerpossible detrimental effects of using price incentives. In this paper, we present such a theory whichis derived from social psychology and focuses on the crowding-out of intrinsic motivation.It stipulates that intrin-