\chapter{\citet{bowles2008social}}
%\citet{bowles2008social} follows on from the above reasoning of \citet{benabou2006incentives}; it is an attempt to clarify the relationship between material and moral sentiments in an integrated framework based on non-separable preferences that isolate the marginal (crowding-in or crowding-out) effect of people's decisions to contribute to a public good based on moral values, and therefore to discriminate between cases where incentives and moral values are complements (crowding-in) or substitutes (crowding-out). They then investigate the design of optimal incentives to contribute to the public good under conditions of non-additive crowding-in and crowding-out effects. this analysis makes it possible to identify cases in which a sophisticated planner cognisant of these non-additive effects would make either more or less use of explicit incentives, by comparison to a n\"{a}ive planner who assumes that they are absent. \citeauthor{bowles2008social} utilises a similar reasoning to \citet{benabou2006incentives}, in this paper \citeauthor{bowles2008social} make obvious the relationship between economic incentives and social norms. Their work expands on that of \citeauthor{benabou2006incentives} and they analyse the marginal (crowding-in or crowding-out) effect of an individuals decision to contribute to a public good based on preferences other than self-interest. As they examine the margin they clearly distinguish policy implications from when incentives and social norms are complements (crowding-in) or substitutes (crowding-out). From here \citeauthor{bowles2008social} look at optimal policy design given these effects and examine the difference between a planner who is cognisant of these effects and a planner who isn't. \citet{bowles2008social} start their analysis by modelling moral sentiments and material interests as compliments or substitutes. …show more content…
They consider a community of identical individuals indexed by $i = 1,...,n$ who may or may not contribute to a public project by taking action ($a^{i} \in [0,1]$) at a cost of $g(a^{i})$. The output of the project depends on each contribution, $\phi(a^{1},...,a^{n})$ and explicit incentives take the form of the subsidy $s \geq 0$ proportional to the amount contributed. Implementation of the subsidy incurs cost $c(s)$ that are increasing in the level of subsidy because higher values of $s$ increase the citizen's incentive to misrepresent the level of their contribution.
They make the assumption that payment of taxes supporting the subsidy has no effect on citizens' behaviour and can be ignored. Therefore the net social cost of the subsidy is $c(s)$.
\citeauthor{bowles2008social} create a value function to represent ethical, other-regarding and social preference influences on an individuals behaviour.
\begin{equation}\label{eq.1} v=a^{i}(\underline{v}+\lambda s) \end{equation} so the marginal effect of $i's$ contributing on $i's$ values is $v_{a^{i}} = \underline{v} + \lambda s$. Under classical assumptions the incentive should have no effect on the marginal value of contributing (i.e. $\lambda = 0$). \citeauthor{bowles2008social} decide not include taxes which in this case would be $s < 0$ because in the literature crowding-out is not symmetrical. This means that the opposite does not necessarily lead to the opposite outcome. This is an important distinction and is a reasonable assumption as it follows the experimental literature. This means that a tax cannot reverse the effect of a subsidy. %The classical separability assumption would maintain that the level of explicit material incentives does not influence the marginal value utility of contributing: that is $\lambda = 0$. They choose to not include taxes ($s < 0$) because motivational crowding out is not symmetrical: in experiments, both bonuses and fines crowd out social preferences (thought typically in different degree) so one cannot reverse the crowding effect by adopting taxes rather than subsidies. This simple formulation however does not capture all the mechanisms at work, however this formulation captures the fundamental issue that values and incentives are either complements or subsidies and provides a method by which we can study the implications for mechanism design. Using (\ref{eq.1}) individual $i's$ utility is \begin{equation}\label{eq.2} u^{i} = \phi(a^{1},..., a^{n}) + sa^{i} - g(a^{i}) + v(a^{i}, s) \end{equation} Varying $a^{i}$ to maximise $u^{i}$ for given values of $s$ and the …show more content…
Under crowding in, values and incentives are complements, as increased use of incentives enhances the marginal effects of contributing on one's values and by (\ref{eq.4}) increases the effects of the subsidy on the citizen's action. Crowding out makes incentives and values substitutes, reducing the effect of incentives on citizen's behaviour. If $\lambda < -1$, which we term strong crowding out, the incentive reduces contributions. From (\ref{eq.4}) it is clear that a positive response by subjects to explicit incentives does not indicate that crowding out is absent; it indicates only that $\lambda >
%\citet{bowles2008social} follows on from the above reasoning of \citet{benabou2006incentives}; it is an attempt to clarify the relationship between material and moral sentiments in an integrated framework based on non-separable preferences that isolate the marginal (crowding-in or crowding-out) effect of people's decisions to contribute to a public good based on moral values, and therefore to discriminate between cases where incentives and moral values are complements (crowding-in) or substitutes (crowding-out). They then investigate the design of optimal incentives to contribute to the public good under conditions of non-additive crowding-in and crowding-out effects. this analysis makes it possible to identify cases in which a sophisticated planner cognisant of these non-additive effects would make either more or less use of explicit incentives, by comparison to a n\"{a}ive planner who assumes that they are absent. \citeauthor{bowles2008social} utilises a similar reasoning to \citet{benabou2006incentives}, in this paper \citeauthor{bowles2008social} make obvious the relationship between economic incentives and social norms. Their work expands on that of \citeauthor{benabou2006incentives} and they analyse the marginal (crowding-in or crowding-out) effect of an individuals decision to contribute to a public good based on preferences other than self-interest. As they examine the margin they clearly distinguish policy implications from when incentives and social norms are complements (crowding-in) or substitutes (crowding-out). From here \citeauthor{bowles2008social} look at optimal policy design given these effects and examine the difference between a planner who is cognisant of these effects and a planner who isn't. \citet{bowles2008social} start their analysis by modelling moral sentiments and material interests as compliments or substitutes. …show more content…
They consider a community of identical individuals indexed by $i = 1,...,n$ who may or may not contribute to a public project by taking action ($a^{i} \in [0,1]$) at a cost of $g(a^{i})$. The output of the project depends on each contribution, $\phi(a^{1},...,a^{n})$ and explicit incentives take the form of the subsidy $s \geq 0$ proportional to the amount contributed. Implementation of the subsidy incurs cost $c(s)$ that are increasing in the level of subsidy because higher values of $s$ increase the citizen's incentive to misrepresent the level of their contribution.
They make the assumption that payment of taxes supporting the subsidy has no effect on citizens' behaviour and can be ignored. Therefore the net social cost of the subsidy is $c(s)$.
\citeauthor{bowles2008social} create a value function to represent ethical, other-regarding and social preference influences on an individuals behaviour.
\begin{equation}\label{eq.1} v=a^{i}(\underline{v}+\lambda s) \end{equation} so the marginal effect of $i's$ contributing on $i's$ values is $v_{a^{i}} = \underline{v} + \lambda s$. Under classical assumptions the incentive should have no effect on the marginal value of contributing (i.e. $\lambda = 0$). \citeauthor{bowles2008social} decide not include taxes which in this case would be $s < 0$ because in the literature crowding-out is not symmetrical. This means that the opposite does not necessarily lead to the opposite outcome. This is an important distinction and is a reasonable assumption as it follows the experimental literature. This means that a tax cannot reverse the effect of a subsidy. %The classical separability assumption would maintain that the level of explicit material incentives does not influence the marginal value utility of contributing: that is $\lambda = 0$. They choose to not include taxes ($s < 0$) because motivational crowding out is not symmetrical: in experiments, both bonuses and fines crowd out social preferences (thought typically in different degree) so one cannot reverse the crowding effect by adopting taxes rather than subsidies. This simple formulation however does not capture all the mechanisms at work, however this formulation captures the fundamental issue that values and incentives are either complements or subsidies and provides a method by which we can study the implications for mechanism design. Using (\ref{eq.1}) individual $i's$ utility is \begin{equation}\label{eq.2} u^{i} = \phi(a^{1},..., a^{n}) + sa^{i} - g(a^{i}) + v(a^{i}, s) \end{equation} Varying $a^{i}$ to maximise $u^{i}$ for given values of $s$ and the …show more content…
Under crowding in, values and incentives are complements, as increased use of incentives enhances the marginal effects of contributing on one's values and by (\ref{eq.4}) increases the effects of the subsidy on the citizen's action. Crowding out makes incentives and values substitutes, reducing the effect of incentives on citizen's behaviour. If $\lambda < -1$, which we term strong crowding out, the incentive reduces contributions. From (\ref{eq.4}) it is clear that a positive response by subjects to explicit incentives does not indicate that crowding out is absent; it indicates only that $\lambda >