#175 The Key to Solving Any Problem
Incentives
Five lanes down the intersection of Irvine Boulevard and Jeffrey Road, towards the north, stands a 20-year-old daycare center run by Mr. and Mrs. Rogers. Every weekday around 5 PM, it becomes the busiest place in the area as parents rush back from work to pick up their kids. The line of cars often makes it hard for anyone to cross the road at that time.
A few months ago, the daycare faced an unusual problem. Some parents were consistently getting late in picking up their kids. This delay caused inconvenience to the daycare staff, who had to stay beyond their working hours. To address this issue, Mr. and Mrs. Rogers decided to charge a fee of $30 per hour for any late pickups. The hope was that this financial penalty would deter parents from being late.
But surprisingly, after a month, the problem got worse. More parents were showing up late. Why? Because the low fee unintentionally became a way for parents to "buy out their guilt." They still felt bad for being late, but paying an extra $30 made them feel less guilty about the inconvenience caused to the daycare staff. The incentive was poorly aligned, and instead of discouraging late pickups, it normalized them.
Realizing this, the daycare raised the fee significantly—to $300 per hour. The result? Almost overnight, late pickups dropped dramatically. The new penalty was steep enough to ensure that parents thought twice before running late. The daycare had finally solved the problem by aligning the incentive with the desired behavior.
This example highlights the profound impact incentives can have. Incentives are the holy grail of economists. There's not a problem in the world that an economist wouldn't try to solve by tweaking incentives. The key is figuring out what motivates people and how to align those motivations with the desired outcomes.
Here’s another example: think about a workplace. If a company wants to encourage employees to meet deadlines, it might offer a bonus for on-time submissions. But what if the bonus is too small? Employees might not feel motivated enough to change their habits. On the other hand, if the bonus is significant, it could create a culture of punctuality. Incentives also play a major role in public policy. Consider recycling programs. Cities often provide financial incentives like bottle deposit schemes, where individuals get a small refund for returning bottles and cans. This simple incentive encourages people to recycle more and helps reduce waste. Similarly, tax rebates on energy-efficient appliances motivate homeowners to make eco-friendly choices. Heard about the EV rebates in California? Incentives! Think about the incentives used to influence health-related behaviors. For instance, some health insurance companies offer discounts or rewards to customers who maintain a healthy lifestyle, such as hitting fitness goals or quitting smoking. These incentives not only benefit individuals but also reduce overall healthcare costs in the long run.
Incentives can be a tricky subject. They hold the power to shape behaviors, solve problems, and sometimes even backfire when not aligned correctly. Poorly aligned incentives can backfire, while well-thought-out ones can drive meaningful change. Next time you’re faced with a problem, think about the incentives at play. You might be surprised how much they matter!
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