by Murray Fulton

See source below

In a recent post on future options for the credit union system in Canada, Dionne Pohler and I argued that to be effective and meet the needs of a wide variety of stakeholders, the new system must rely on a mix of both extrinsic and intrinsic incentives. What are these two types of incentives? And why are they important?

Extrinsic motivations are monetary rewards or penalties such as pay-for-performance schemes and financial payments for not complying with rules and regulations. Extrinsic incentives work, it is believed, because people make decisions based on the financial costs and benefits of the options they face.

Intrinsic motivations, in contrast, can be observed in the desire to undertake activities simply because they are enjoyable or because they generate satisfaction — the wish to do a job well or to undertake a task because it leads to some greater good. The mission motivation that drives the behaviour of many people is a good example of an intrinsic incentive.

While these two motivations have long been known, the general belief was that they operated independently of each other. As a consequence, extrinsic incentives could be increased without having any effect on intrinsic motivation.

Recent research, however, has shown that these two motivations are often not independent. In fact, replacing intrinsic with extrinsic incentives — as is done, for instance, in the case of pay-for-performance — can often result in a drop in the overall motivation and a reduction in the very activity that was to be encouraged. In short, there may be a crowding-out effect; introducing extrinsic incentives may have an impact exactly opposite to what was intended. In other situations, however, there can be a crowding-in effect, with extrinsic incentives supporting even greater intrinsic motivation.

The roots of the crowding out/in effect are psychological and are based on the idea that extrinsic incentives represent a shift in control to factors external to the decision maker. If this shift is perceived as controlling, then the decision maker’s self-esteem and self-determination are eroded, and intrinsic motivation is reduced due to a perceived lack of personal agency. The result is crowding out. In contrast, if the extrinsic incentives are perceived as supportive, self-esteem and self-determination rise, and intrinsic motivation increases because of the perceived growth in personal agency.

One example of the crowding-out effect is the not-in-my-backyard problem, or NIMBY as it is often called. In a study of public attitudes towards building a nuclear waste repository in Switzerland, it was found that support dropped sharply when residents were told they would be compensated financially if it was built in their area. In this case, the extrinsic incentive eroded people’s intrinsic motivation to do their public duty and accept the facility.

Crowding-in and crowding-out effects are likely to be important in credit unions and co-ops because of the significant role that mission orientation plays in these organizations. Mission orientation shows up in the motivation of managers and CEOs, in the policies adopted by credit unions, in the decisions of people to form co-operatives, and in the efforts members make to support and contribute to their co-op or credit union. A future blog post will explore the role of crowding in and crowding out in a number of these examples.

References

Frey, Bruno S., and Felix Oberholzer-Gee. 1997. “The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out.” American Economic Review 87 (4): 746–55.

Frey, Bruno S., and Reto Jegen. 2001. “Motivation Crowding Theory.” Journal of Economic Surveys 15 (5): 589–611.

Image credit: Wikiversity. “High-risk business motivation: What motivates people to engage in high-risk business decisions?” Online at https://en.wikiversity.org/wiki/Motivation_and_emotion/Book/2015/High-risk_business_motivation. Last modified 23 November 2015. Accessed 11 February 2017.

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