ABSTRACT
This chapter outlines the impact of “A Fine is a Price” and the closely related “Pay Enough or Don’t Pay at All,” both published by Gneezy and Rustichini in the same year. The papers are a uniquely important contribution to experimental and behavioral economics, demonstrating why taking psychology seriously is critical for the most basic of economic questions – how people respond to incentives. I first summarize the main findings: that the introduction of financial incentives, whether they be rewards or fines, can potentially backfire by decreasing motivation to perform the targeted behavior. This result contradicts a core prediction of standard economic theory, which posits that effort should respond positively to outcome-contingent incentives. I then review the large theoretical and empirical literature that was inspired by the studies of Gneezy and Rustichini, which includes papers in economics, management, psychology, and public policy. Finally, I highlight that the work’s influence extends beyond academic research, contributing to the discourse on incentives amongst managers, policy makers, and in the popular press.
