My Thoughts on Inducements and Policy Paradox in Action

The fourth section in Stone's book deals with solutions to policy problems. Stone lists five possible solutions: inducements, rules, facts, rights, and powers. Sometimes we refer to these solutions as policy instruments or policy tools. They serve as the mechanisms through which government or the community exerts its power on individuals to change their behavior. I chose to assign chapter 11 on inducements rather than one of the other chapters because inducements tend to be our preferred tool in American public policy.

Inducements are the common strategy of rewarding preferred behaviors and penalizing undesired actions. Sanctions and incentives are two-sides of the same coin. They allow the individual to choose his or her behavior but seek to alter the anticipated rewards or penalties for carrying out that behavior. The removal a sanction for good behavior or an incentive for bad behavior illustrates the inter-related nature of sanctions and incentives. This is especially true when we consider research in behavioral economics. Studies have shown that we feel a loss much more sharply than we feel a lack of gain. In other words, you would feel worse about a salary reduction of $300 a month than you would feel about not getting a raise of $300 a month even though they are numerically equivalent.

Inducements are based on the understanding of human behavior characteristic of economics. It assumes that individuals are rational, that they know what will make them happy, and that they act to maximize their happiness. In order for inducements to work individuals must have control over their behavior, they must know about the possible penalty or reward, and they must be able to change their course of action. When inducements are used to act on a group or another collective entity, these assumptions usually fail. At the vary least, it makes the rational decision-making process more difficult. Inducements must be designed differently in these cases to account for the processes of group decision-making in a particular context.

Inducements are also affected by time. It is rare for an incentive or sanction to be delivered immediately after a good or bad action occurs. Even when we can deliver such an inducement, it always occurs after the act. Individuals or groups must be able to anticipate such inducements before they carry out a behavior. Many of our financial incentives and sanctions are delivered through the tax code. This creates a gap in time of up to a year from when the behavior occurs to when the inducement is delivered. If individuals or groups do not believe they will personally have to deal with long-term penalties or receive long-term benefits, then the inducement will be ineffective.

Inducements tend to imply purposeful action. They may try to alter actions with either intentional or inadvertent causes, but they do little to alter mechanical or accidental causes over which individuals have no control. This is why causal stories can be very important. If you want to benefit or burden a group using inducements you have to be able to tell a story about purposeful actions. Although not assigned for this class, the documentary and book, Freakonomics tells a story about the use of monetary inducements to encourage students in a high school to improve their grades. The program seems to work for some students but does not for most of them. This is a common story in public policy. Any time we use a policy tool, particularly inducements to alter behavior we have three groups. We have a group who will always do the desired behavior, a group that will never do the desired behavior, and a group that will change its behavior in response to the right inducement. This group is called the marginal group. Designing a good inducement is difficult because we have to decide the correct value of the inducement and target it to the changeable group. This can bring up a tension between efficiency and equity. It would be more equitable to ensure that everyone who performs a good behavior is rewarded with an incentive, but it is not efficient to reward the group who would perform a good behavior without an incentive.

Although positive and negative inducements are two-sides of the same coin, they can have different effects in the polis. Positive inducements help communities to build trust, goodwill, and cooperation while negative inducements can create conflicts and divisions. Rewards build upon a shared sacrifice. The giver gives up the reward and the receiver gives up his or her desired behavior. Sanctions result in one or both parties experiencing a cost or loss. Of course, we must remember that whether rewards or sanctions are offered, they are both based on an unequal power relationship where one group or individual is able to change the behavior of another.

The design of inducements in the polis is an art. Large positive incentives can lead to excessive competition and even cheating. Large negative sanctions can lead to a reluctance to enforce them. Sanctions or rewards that require a lot of effort on behalf of the giver are often not carried out. Incentives and sanctions can easily become guarantees when the giver is perceived as having little will or power to remove them. When the giver and receiver are very different, there may be a misunderstanding about what type of incentive or sanction will change behavior. Symbolic understandings of need come into play because behaviors that are tied to identity are often impossible to change.

Of course, no inducement operates in isolation. Individuals and groups are motivated by their own desires, but also by inducements imposed by government, business, friends, family, colleagues etc. Even if we accept the assumption that humans are calculating and weigh costs and benefits before they act, an inducement instituted through the policy process is only one small influence on behavior. This is especially true when individuals can adapt their behavior to strategically avoid the consequences of a sanction or reap the rewards of an incentive when it is not really deserved. Going back to the Freakonomics example, if we targeted our incentive only to those students who were able to bring their grades up from a D or F to an A or B, we may see a group of formerly A or B students whose grades drop significantly so they can later receive the incentive for bringing their grades back up to A's or B's. We often refer to this as a perverse incentive, but it is really a consequence of individual rational choice and adaptability.