A few people that (thankfully) actually read what I write have asked why I specifically mention the potential effects of “insultingly small” monetary incentives. In general, I make the point that a small monetary incentive can crowd out an intrinsic moral incentive. I am careful to limit this assertion to small incentives, since economic research has shown this to be empirically true only on a small scale. This doesn’t mean that there is evidence that a large monetary incentive doesn’t crowd out a moral incentive, it just means that the large incentives haven’t been tested, probably due to resource (or fairness) constraints. Consider the following example:
Gneezy and Rustichini (2000, JLS) performed a field experiment with 10 day care centers in Haifa, Israel. These day care centers were having problems with parents picking up their children late, which (to me at least) is not surprising since there was no specific penalty for doing so. In order to combat this problem, the day care centers instituted a fine of 10 Shekels per child if a parent arrived more than 10 minutes late. Economic theory would obviously suggest that, since the price of picking up a child late has increased, there would be less of that activity. However, what the researchers saw was that more, rather than fewer, parents started picking up their children late. It is also important to note that this higher level of tardiness persisted even after the fine was taken away (at least for the period that the researchers observed.) The authors of the study make the claim that this evidence is consistent with the crowding-out of the original moral incentive.
The authors of this study are careful to point out that the fine is “relatively small but not insignificant”. They go on to mention, for example, that an illegal parking fine is 75 Shekels, and the failure to pick up dog droppings results in a fine of 360 Shekels. (I know, I know, I just coldn’t resist adding that one in.) Furthermore, a baby-sitter earns between 15 and 20 Shekels per hour. My hypothesis is that the economically expected behavior would have been observed had the fine been larger. The parents likely took the fine as an approximation of the inconvenience to the teachers, and may have realized that they were previously overestimating the inconvenience to others.
As a side note, I really like the signs in Vermont that say “DUI: You Can’t Afford It”. Most states post signs giving specific dollar amounts for various offenses, but I think that the fear of the unknown is a much better incentive, if for no other reason than it prevents people from making an explicit cost/benefit comparison.
For a more thorough treatment of the crowding out effect, see here. (Note that the authors of this site describe a “significant monetary fine” in the day care example, which I feel implies the fine to be larger than it actually is.)