excerpts from Chapter 1 of THE ARMCHAIR ECONOMIST: Economics and Everyday Life by Steven E. Landsburg

The Power of Incentives

Most of economics can be summarized in four words: "People respond to incentives."  The rest is commentary. 

     "People respond to incentives" sounds innocuous enough, and almost everyone will admit its validity as a general principle.  What distinguishes the economist is his insistence on taking the principle seriously at all times. 

     I remember the late 1970s and waiting half an hour to buy a tank of gasoline at a federally controlled price.  Virtually all economists agreed that if the price were allowed to rise freely, people would buy less gasoline.  Many noneconomists believed otherwise.  The economists were right: When price controls were lifted, the lines disappeared.

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     There is evidence that people respond significantly to incentives even in situations where we do not usually imagine their behavior to be rational.  Apparently psychologists have discovered by experiment that when you hand a person an unexpectedly hot cup of coffee, he typically drops the cup if he perceives it to be inexpensive but manages to hang on if he believes the cup is valuable. 

     Indeed, the response to incentives may be as innate as any other instinctive behavior.  In a series of experiments at Texas A&M University, researchers have allowed rats and pigeons to "purchase" various forms of food and drink by pushing various levers.  Each item has its price, such as three lever pushes for a drop of root beer or ten for a piece of cheese.  The animals are given "incomes" equal to a certain number of pushes per day; after the income is exhausted the levers become inoperable.  In some versions of the experiments the animals are able to earn additional income by performing various tasks.  They earn additional lever pushes at a fixed wage rate for each task they perform.

     The researchers have found that rats and pigeons respond appropriately to changes in prices, changes in income, and changes in wage rates.  When the price of root beer goes up, they buy less root beer.  When wage rates go up, they work harder -- unless their incomes are already very high, in which case they choose to enjoy more leisure.  These are precisely the responses that economists expect and observe among human beings. 

     Incentives matter.  The literature of economics contains tens of thousands of empirical studies verifying this proposition, and not one that convincingly refutes it. ... 
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    Through all the variations, one theme recurs: Incentives matter.


-- excerpted from Chapter 1of  THE ARMCHAIR ECONOMIST: Economics and Everyday Life by Steven E. Landsburg
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Wait a minute.  Maybe incentives don't matter when it comes to voting.  See THIS.



 
 
 
 
 
  

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