Optimal Incentives on Multiple Prosocial Activities when Reputation Matters*

• Date: 01 July 2020
• DOI: http://doi.org/10.1111/sjoe.12369
• Published date: 01 July 2020

Scand. J. of Economics 122(3), 1207–1230, 2020

DOI: 10.1111/sjoe.12369

Optimal Incentives on Multiple Prosocial

Activities when Reputation Matters*

Francisco Candel-S´anchez

Universidad de Murcia, 30100 Murcia, Spain

fcandel@um.es

Juan Perote-Pe˜na

Universidad de Zaragoza, 50009 Zaragoza, Spain

jperote@unizar.es

Abstract

In this paper, we present a signaling model in whichindividuals engage in socially beneficial but

costly activities in order to convey information about their willingness to cooperate with other

agents. When severalactivities are available, the inclusion of monetary compensations in any one

of them affects the relative costs of undertaking each activity and, therefore, their informative

value for agents. We find the subsidies that maximize social welfare, which are shown to depend

critically on the reputation gained from each activity. Finally,we use comparative statics analysis

to study the effects on optimal subsidies of changes in their determinants.

Keywords: Economic incentives; signaling; social welfare

JEL classification:D03; D78; D82; H31; H41

I. Introduction

Prosocial activities, such as volunteering, blood donations, and giving

to charities, are essentially privately provided public goods, and donors

face a prisoner’s dilemma situation. Public decision-makers often establish

subsidies to encourage the provision levels of activities that generate

positive externalities, but the empirical evidence suggests that material

incentives can be counterproductive in practice, inducing partial or total

crowding out of prosocial behavior.1Several psychological mechanisms

have been proposed in the literature to account for this. Bowles and

Polan´ıa-Reyes (2012) argue that “incentives may (i) provide information

*We thank Jorge Navarro for helpful advice on doubly truncated distributions. We also thank

three anonymous referees and Stephen Hasler for helpful comments and suggestions. Financial

support from the Spanish Ministry of Economy and Competitivenessthrough MEC/FEDER g rant

ECO2016-75631-P is gratefully acknowledged.

1See Frey and Jegen (2001) for a survey,and Gneezy et al. (2011) for an analysis of the contexts

where incentives (do not) work tomodify behavior.

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The editors of The Scandinavian Journal of Economics 2019.

1208 Optimal incentives on multiple prosocialactivities when reputation matters

about the person who implemented the incentive, (ii) frame the decision

situation so as to suggest appropriate behavior, (iii) compromise a control

averse individual’s sense of autonomy, and (iv) affect the process by

which people learn new preferences.” In this paper, we obtain a particular

crowding-out effect for a new reason: because agents can use a number

of mutually exclusive prosocial activities to signal their degree of altruism

credibly, monetary incentives will change their relative costs (or prices) and,

therefore, cause shifts in behavior that might lead to a lower aggregate level

of all prosocial activities.

Imagine that a local government is considering subsidizing two volunteer

activities: (1) conservation (repairing paths, clearing ponds and waterways,

and planting trees); (2) caregiving (providing assistance and support to

people with developmental needs, such as helping people with learning

disabilities). Both types of prosocial activities are publicly visible, and

undertaking either of them improves the image and reputation of the

volunteers. Now, imagine that the local government seeks to promote forest

clearing by offering a subsidy. Although the new incentive encourages

people to participate in conservation activities, it might also reduce the

amount of volunteer caregiving, even to the extent of decreasing the

total amount of volunteering. This paradoxical result can be attributed to

cross effects arising when subsidies for (potentially competing) prosocial

activities change their relative benefits.

There are many real-world examples where material incentives for a

prosocial activity crowd out other similar and related prosocial activities.

For instance, Rob´er t and Jonsson (2006) find that a free public transport

policy does not substantially reduce private vehicle use. Instead, this

policy crowds out other prosocial modes of transport, such as walking

or cycling. Similarly, economic incentives on electric vehicles (EVs),

although replacing conventional vehicles to some extent, also increase

overall car transport and substitute public transport and other means of

transport (see, for instance, Halvorsen and Frøyen, 2009; Franke et al.,

2012; Figembaum et al., 2014; Holtsmark and Skonhoft, 2014). Kits et al.

(2014) show that the introduction of incentives for conservation activities

(in the form of conservation auctions) reduces monetary donations to an

environmental charity. Lilley and Slonim (2014) find that time donations

(volunteering) and monetary donations are likely to be net substitutes, and

that a matching donation is effective in increasing monetary donations,

but also causes a substitution away from volunteering. In the context of

solid waste management and recycling, empirical studies by Kinnaman and

Fullerton (2000) and Hong (1999), among others, show that collection fees

on garbage disposal might increase illegal dumping or burning.

In this paper, we propose a stylized model to account for these effects.

We first characterize the optimal structure of incentives on prosocial

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The editors of The Scandinavian Journal of Economics 2019.