Crowding out in the labor market: a prosocial setting is necessary

Recent studies, mostly from prosocial settings, suggest that monetary rewards may crowd out effort exertion by economic agents. We design a field experiment with data entry workers to investigate the extent of such crowding-out effects in a labor market. Using simple variations in the job description of a task, we induce a natural work setting under the work frame and emphasize social preference under the social frame. We find that crowding out of labor participation critically depends on framing--whereas small monetary rewards reduce the participation rate under the social frame, the participation rate is nondecreasing in the wage rate under the work frame. Moreover, among the workers who participate in the task, those who receive a positive wage perform a considerably higher amount of work than those who are paid zero wage under either frame. Thus, there is weak evidence of crowding out only when the task is explicitly given a prosocial flavor and not under a regular work setting. Furthermore, emphasizing social preference in the labor market in such a way reduces the overall labor supply and seems to have an adverse effect on the quality of work. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1807. Keywords: social preference; labor supply; crowding out; intrinsic and extrinsic motivations; natural field experiment History: Received June 27, 2012; accepted June 12, 2013, by John List, behavioral economics. Published online in Articles in Advance December 18, 2013.
1. Introduction Although traditional economic theory concentrates on monetary incentives as the main motivator behind decision making, anecdotal and experimental evidence suggests that extrinsic motivations may impair effort by economic [...]