THE COST OF CHOICE ON PROSOCIAL BEHAVIOR:

TESTING FOR THE CROWDING OUT OF INTRINSIC INCENTIVES BY SIGNALING

Anthony Ding

Abstract
Incentives can have a strong impact on supply of prosocial behavior. Past studies have studied the effects incentives on prosocial behavior but few have looked at the potential interaction between the effects of two incentives. In this paper, we look at the effect of choice on prosocial behavior. We hypothesize that perhaps current models of signaling incentives are inadequate in that they do not take into account an important negative signaling of deviation of an individual s choice from social norms. We also observe how this effect might potentially change when we factor in the effect of signaling incentives.

Introduction

The effect of incentives on effort is a well-studied and written about field. This paper focuses specifically on the effect of incentives on prosocial effort. One form of prosocial behavior which can and has been measured frequently is monetary donations to charity. In 2011 alone, 143 million Americans reported donating money to a charity within a single month (World Giving Index 2012). Of particular interest to those looking to study the supply of prosocial behavior such as donations to charity is the incentives behind it. Assuming an individual looks to maximize his or her own utility, the utility maximizing decision

should be to donate nothing. The fact that this is not the observed case and that there is evidence that individuals donate significant amounts to charity indicates that the decision to engage in prosocial behavior must depend on other factors. While there have been many studies on what exactly these factors are, a good summary of these factors include an individuals intrinsic incentive, the existence of external incentives, and signaling incentives (see Benabou and Tirole 2006). There have been a fair amount of studies pinpointing the effects of external incentives on intrinsic incentives to engage in prosocial behavior (see Gneezy and Rustuchini 2000; Lacetera, Macis, and Slonim 2006). A lesser-explored but nevertheless interesting extension is the interaction between terms; more specifically, the individual effects of a single incentive conditional on the other two. Ariely, Bracha, and Meier (2007) show that the introduction of external incentives can change the effect of signaling and that while external incentives seem to generate the standard economic effect of increasing effort, changing the visibility could result in a complete reversal in the effect of external incentives. These papers show that effect of signaling is important theoretically but also practically. Theoretically, determining how signaling reacts with the other two incentives can be important for understanding utility maximizing decisions made by individuals and the mechanics behind the decisions. Practically, this has implications for charities and governments that are looking to maximize prosocial behavior. Despite this, there are few papers that explore the specific effects of signaling incentives and how they could change the effectiveness of other incentives.

This paper hones in on the effect of signaling incentives and asks specifically how an introduction of choice in a charity giving model might interact with signaling incentives. Current models of signaling incentivessometimes referred to as image motivationspecify that these incentives depend on an individuals personal intrinsic and extrinsic motivations. This study proposes that signaling incentives do not depend only on factors endogenous to the individual, but also exogenous factors determined by an individuals peers such as societal norms. This study also differs from previous analyses by introducing the freedom of choice into the charity donation model. We contend that while studies with a fixed chrity this may help explain individual decisions on prosocial effort for the given charity, a more realistic scenario involving choice may reveal broader general interactions which may be more externally valid. The introduction of choice into the prosocial model creates differences in individual choices due to unique preferences. These differences allow us to measure the deviation of an individuals choice from a social benchmark. This study explores the effect of the estimated difference, or deviation, of an individuals choice from the benchmark choice and how it might factor into signaling incentives. We therefore propose a study that observes the effect of choicewhich can be considered an intrinsic incentiveon the supply of prosocial behavior, controlling for extrinsic incentives and any signaling incentives that are already included in the existing models of prosocial behavior. In section 2, we review existing literature on this topic and build an analytical framework on which to base our assumptions and hypotheses. In section

3, we outline the specific behavioral hypotheses of this paper and in section 4, we outline a proposed experiment design to test for these hypotheses. Section 5 is a discussion of possible results and the implications of these results. Section 6 is a brief discussion of possible extensions to this experiment.

Literature Review

Literature on the topic of incentives is abundant and well-explored. Within that literature, a fraction is focused specifically on the effects of incentives on prosocial behavior. An even smaller fraction of these focuses on the interaction of incentives on charitable donations. While much of the literature surrounding specific interactions is interesting and relevant to the study proposed in this paper, in order to begin discussing the effects these incentives have on prosocial behavior, we begin with a discussion of a mathematical model that describes the relationship these incentives have with the supply of prosocial behavior. In their paper, Benabou and Tirole (2006) discuss a basic model of prosocial behavior and attribute it to three major incentives. In the case of individual preferences, Benabou and Tirole hypothesize that the utility gained from prosocial behavior is a function of and where the former is an individuals intrinsic valuation for prosocial behavior and the latter is an individuals valuation for extrinsic rewards. This represents an individuals intrinsic and external incentives. The model is further extended with discussion of social signaling. Benabou and Tirole decompose the effect of signaling on utility by representing it as a function of
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the level of prosocial behavior an individual supplies, , and the amount of extrinsic incentive they receive, . They represent the total effect of signaling on utility with the following equation (, ) = [ ( |, ) ( |, )], where measures the visibility of an individuals actions and 0 and 0 reflect the two competing signaling motivations of appearing altruistic and appearing greedy. This model is based off the assumption that individuals are utility maximizing and it tells us that when deciding how much prosocial behavior to supply, individuals base their decisions on their own intrinsic and extrinsic incentives and on the signal they send, which is a function of how altruistic and greedy they appear to be. It is important to note that in the model, the variables and are exogenous. These represent the extrinsic rewards for prosocial behavior and the visibility of this behavior and both have an effect on the external and signaling incentives of an individual. The implication of this is that by varying the level of , we can control the effect signaling has on an individuals decision to supply prosocial behavior. This is important because it will allow us to analyze the effect on signaling incentives by observing the supply of prosocial behavior with a very low visibilitycorresponding to a very low value of and the supply of prosocial behavior with high visibility and calculating the difference. This represents the economic model which this paper will refer to on occasion and base simple assumptions on.

An oft-cited paper on the effects of incentives on prosocial behavior is a paper on the effects of a extrinsic incentive on blood donation by Nicola Lacetara, Mario Macis, and Robert Slonim (2009). In this study, Lacetera, Macis, and Slonim observe data from American Red Cross blood drives between the years 2006 and 2008. In each observation, an object of some monetary value was given to donors, i.e. mugs, blankets, coupons. Lacetera, Macis, and Slonim used the approximate monetary values of these objects to estimate the magnitude of the extrinsic incentive. They found that there was a positive relationship between extrinsic incentives and the amount of prosocial behavior which allowed them to conclude that extrinsic incentives did not crowd out intrinsic incentives. After conducting a separate field test where incentives included gift cards of varying values, they found that there was evidence of a substitution of donors from neighboring blood drives, meaning the positive effect could have been overestimated. A similar study on extrinsic incentives was done by Dan Ariely, Anat Bracha, and Stephan Meier (2007). In this study, the effect of a monetary incentive on charitable donation was looked at in a controlled experiment. Ariely, Bracha, and Meier found the same effect of an increase in donations with increased monetary incentives. However, they only found this relationship in the private condition of their study. When they made the extrinsic incentives visible to the public, they actually found the opposite effect, where monetary incentives decreased the amount donated. The experimenters attributed this effect to the fact that in the public condition, the signaling of altruism through prosocial behavior is diluted because it

is no longer clear whether or not an individual is donating out of pure altruism, reducing the total supply of charitable donations. Ariely, Bracha, and Meier also carried out a corresponding field experiment in which they measured the distance biked on stationary bikes in the gym and donated a certain marginal amount per mile biked to charity. They found the same results as they found in the lab study, albeit less pronounced due to the lack of randomization. These two studies on extrinsic incentives extend our understanding of the incentives model in that they paint a clear picture of the effects of extrinsic incentives and how they might crowd out signaling incentives. In the study carried out by Lacetera, Macis, and Slonim, even though the extrinsic incentives were visible, they did not observe the same crowding out effects of these incentives on signaling like Ariely, Bracha, and Meier did. Presumably, this was because in the blood donor case, small gifts were given after the blood donation while in the second study, monetary incentives were specifically stated as marginal payments per additional unit of effort. An interesting variation on incentives published by Cristina Bicchieri and Erte Xiao in 2009 looked at how empirical and normative expectations can affect prosocial behavior. They did this through a dictator game in which participants are given data from past iterations that listed the actual choices made by the dictators and also what dictators believed ought to have been done. Bicchieri and Xiao concluded that empirical expectations, what subjects expected others to do, were the main motivators in conforming to the norm. This study is that it suggests that

social norms may have an effect on the amount of prosocial behavior. This is significant because our current model as proposed by Benabou and Tirole does not account for this effect of conforming to the norm. As explained earlier, one of the purposes of the study is to test for the robustness of this effect and to determine how it fits into the broader model of prosocial behavior. In 2010, Ayelet Gneezy, Uri Gneezy, Leif D. Nelson, and Amber Brown published a paper on charity in a pay-what-you-want pricing scheme. They carried out a field experiment in which they compared the amounts paid when a donation of charity was added to fixed price condition and a pay-what-you-want price condition. They found that in the pay-what-you-want pricing condition, adding a donation to charity significantly increased the average payment and total payment. In the fixed pricing condition, they found that while adding a charitable component did increase the total amount paid, the increase was not as much as it was in the pay-what-youwant condition. In this case, Gneezy et al. found that the choice of price increased the amount paid and thus the amount donatedthe donation to charity was a fixed 50% of the price. While this paper was a little less focused on the effect of incentives on prosocial behavior than previous studies, this was one of the first papers that looked at the effect of choice in relation to charity. More specifically Gneezy et al. considered the scenario in which individuals have the power of choice in determining how much to contribute to charity. In this paper, we observe a similar effect but instead of looking at choice in price, we look at the choice in cause.

Hypotheses

In answering the question of whether or not signaling interacts with the effect of choice, we develop two basic hypothesis to (1) explain the effect of choice on an individuals intrinsic incentives and (2) explain how the change in intrinsic incentives can be effected by the signaling incentives. Gains from Choice Hypothesis. An individuals intrinsic incentive is given by Benabou and Tirole as a determinant of the amount of prosocial behavior supplied. An individuals utility at any given supply of prosocial activity is thus a function of, among others, the individuals intrinsic valuation from prosocial behavior. To each individual, however, utility is determined by his or her preferences. In a choice model, the individual is given the chance to choose the charity he or she wishes to donate for. Under the assumption that the utility function for prosocial behavior is correctly modeled and does not omit any other possible factors and that individuals seek to maximize utility, the introduction of choice should allow individuals to maximize their value of by choosing the charity they intrinsically care about the most. It follows then that, ceteris paribus, because the supply of prosocial behavior is a function of , an introduction of choice should increase an individuals supply of prosocial behavior. Deviation Hypothesis. This hypothesis is the crux of the paper and is based on the prosocial behavior supply model proposed by Benabou and Tirole. The hypothesis is based on a choice model in which each individual is able to make a utility maximizing choice and we are able to somehow quantify this choice. We
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propose that the utility gained from signaling, (, ), is not only a function of an individuals desire to be seen as altruistic and not greedy, but also a function of an individuals knowledge of how deviant his or her choice is from the social ly accepted benchmark of a good charity. By good, we mean a charity that supports a cause that most people are likely to identify with. We can thus consider a modified model for the utility of signaling which takes into account some threshold for a socially accepted good charity and an individuals choice of charity or cause where (, , , ) = [ ( |, ) ( |, ) ( )] And where > 0 is some multiplier that represents an individuals desire to be seen as less deviant from the social norm. This means that if an individual chooses to donate to a charity that is at the threshold of a good charity, there will be no adverse effect on his or her utility from deviation signaling. If, however, an individuals choice of charity deviates from the socially determined threshold, the individual will experience a loss in utility proportional to the amount by which his choice deviates from the norm. This loss in utility can be intuitively explained by the results of Bicchieri and Xiao (2009) which showed that prosocial behavior is strongly affected by an individuals knowledge of the expected behavioror the social norm. Intuitively, this hypothesis says that, assuming individuals are maximizing utility, given a choice of charities, some will substitute away from deviant choices of charity and pick charities closer to the social norm. However, because theyve now deviated from their preferred charity, their intrinsic incentives, represented by , have decreased, leading to a lower amount of donation given to

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charity. This decrease in intrinsic incentives represents the crowding out effect of deviation signaling incentives. An important point to note about the deviation hypothesis is that deviation signaling arises from choice. If there is no choice, will be constant for all donors.

Experimental Design

In order to accurately assess the effects of the deviation hypothesis, the experiment must have the following properties: (1) the deviation in individual choice from the social average must be clear and unambiguous to the individual, (2) the distinction between the private and public case should be clear, and (3) the effect of deviation signaling should be isolated and noise from other signaling effects should be minimized. In this experiment, the choice of task to represent effort towards donating to a charity is given some small consideration as well. In order to accurately associate differences in effort to one of the effects of prosocial incentives, the task chosen must be easily performable by all subjects and should ideally have a low standard deviation of performance. In other words, deviations in performance from subject to subject should not arise from a subjects intrinsic ability to perform the task. The proposed task in this experiment is identifying shapes. Participants will be shown a row of shapes and be told to identify a specific shape at random. Presumably, base performance on this task should have a low variance and any variation due to differences in, for example, reaction speed should be insignificant. Each shape
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identified would correspond to a marginal donation of 5 cents to charity and participants will have a total of 2 minutes to identify shapes. A total of 100 participants will be randomly selected and ideally from a sample representative of the population. In order to select the charities from which the participants will choose from, we will survey a separate random sample of participants from the same population. They will be given a small pamphlet on roughly 20 random charities with brief descriptions of the causes they support. They will then be asked to list three charities which they think the public would most identify with, three charities the public would least identify with, and three neutral charities. The subjects are asked to make these selections independent of their own preferences. The charities will then be listed in the order by the frequency of appearance in three separate lists arbitrarily named good, bad, and neutral charities corresponding to the three questions. For example, a good charity might be the Salvation Army, a bad charity might be the National Rifle Association, and a neutral charity might be the Smithsonian Institute. The Salvation Army is not a good charity because it is absolutely better than other charities, but because it is likely to be supported by the most people; likewise, the National Rifle Association is not absolutely worse than other charities. The top two charities from each list will be taken and these will make up the list of six possible charities to choose from. In order to illicit the survey respondents true beliefs, they are told that for each charity they list that makes it

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within the top three in the frequency list for each question, they will be given a $2 reward. A 2x2 between-subjects design is used with the two parameters being Exposure and Choice. Choice. In the choice condition, participants will be allowed to choose the charity they wish to donate to from the list of six charities we generated above. In the no choice condition, a charity that is classified as neutral will be randomly assigned to be the target charity. Exposure. In modifying exposure, there are two conditions: the private and public condition. In the private condition, donations are made anonymously. In the public condition, after donations have been made, a list of donors and the charities they donated to will be posted in a highly visible area. Note that the private condition implies a very small signaling incentive and the public condition implies a higher effect of the signaling incentive. To see this, recall that the signaling incentive is multiplied by some which represents visibility. In the private condition, is zero or close to zero, which means that in the private condition, subjects will not take signaling into account when deciding how much to donate. In order to test specifically for the effects of deviation signaling and intrinsic incentives, we first isolate the effect of signaling. To do this, we do not introduce a monetary incentive to donate. In order to isolate the effect of signaling to show only the effect of deviation and not capture signaling related to altruism and greed, we do not post the amounts donated in the public condition. In this case, the effect of

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signaling is isolated to the deviation effect through the posting of donors and associations with the charity they donated to. In other words, when we talk about the effect of signaling in this study, we mean specifically the effect of deviation signaling. If there is no effect of signaling in this study, it would mean there is no effect of deviation signaling as the hiding of amounts and the lack of extrinsic rewards controls for the effect of altruism and greed signaling.

Potential Results

Although we do not have data with which to work with, we can list some potential results and interpret them. If, in the private condition, we observe a higher amount of total contributions from the choice group than from the no choice group, this will verify the gains from choice hypothesis, which states that, ceteris paribus, an addition of choice should increase the supply of charity given by an individual. This means that if there is any significant positive gap in the total amount of charity donated between the choice and the no choice groups in the private condition, there is support for the choice hypothesis. In the public condition, if we observe that the total amount of charity given in the choice group is less than the total amount of charity in the choice group in the private condition, we can conclude that the data is consistent with deviation hypothesis which states that the negative effect of deviation signaling will cause individuals to substitute to other charities and donate less overall due to the fact
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that some are now donating to charities that they dont support themselves, but that they believe society in general does. Note that because weve controlled for altruism and greed signaling, if the line representing the choice group has a slope that is significantly not equal to zero, there is evidence for an effect from deviation signaling.

total amoutn contributed to charity

choice no choice

private

public

The chart provided above shows a possible iteration of data that would support our hypotheses. In the no choice group, we would expect no significant change in total donated in the public condition because the deviation hypothesis arises as a consequence of choice, which is constant.

Extensions

A very quick and easy extension we could experiment with would be to vary the fixed charity in the no choice condition. Instead of using a random neutral charity, we could vary it with one no choice group with a random good charity and one no choice group with a random bad charity. If the deviation hypothesis
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holds, we should see, like in the main experiment, a relatively constant slope because the values of would be constant within the no choice, good and the no choice, bad. However, the amount of deviation would change between the two groups so we would expect to see different intercepts. An example of data consistent with the deviation hypothesis is shown below.

total amoutn contributed to charity

choice no choice, good no choice, bad

private

public

Although the slopes should not be significantly non-zero, we might expect to see an insignificant upward slope on the no choice, good line and a slight downward slope on the no choice, bad line due to residual effects of altruism signaling. Another interesting extension could be a test of the ability of the deviation hypothesis to be applied more generally. In other words, we could test whether the negative signaling effects of deviation hold also for deviations in other parameters. An example of this would be testing for deviations in the individual amount donated from the average amount.

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References
Ariely, Dan, Anat Bracha, and Stephan Meier. 2007. Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially. Federal Reserve Bank of Boston Working Paper No. 07-9. Benabou, Roland, and Jean Tirole. 2006. Incentives and Prosocial Behavior. American Economic Review, 96(5): 165278. Bicchieri, C. and Xiao, E. (forthcoming) "Do The Right Thing: But Only If Others Do So", Journal of Behavioral Decision Making. Gneezy, A., Gneezy, U., Nelson, L. D., & Brown, A. (2010). Shared social responsibility: A field experiment in pay-what-you-want pricing and charitable giving. Science, 329, 325327. Gneezy, U. and Rustichini, A. (2000a), A Fine is a Price, Journal of Legal Studies, 29 (1) (part 1), 117. Gneezy, U. and Rustichini, A. (2000b), Pay Enough or Dont Pay at All, Quarterly Journal of Economics, 115 (3), 791810. Lacetera, Nicola, Mario Macis, and Robert Slonim. Forthcoming. Will There Be Blood? Incentives and Substitution Effects in Pro-social Behavior. American Economic Journal: Economic Policy. World Giving Index 2012. (2012): 20-21.

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