Dan Ariely dedicates an entire chapter in Predictably Irrational on when payment is and isn't appropriate and the chaos that happens when you screw up. It's worth a read. The short version is this: let's say you pay a token amount. All of a sudden, the people for whom that token is inconsequential take it as an insult. "Sitting there for half an hour literally giving you blood is only worth $10 to you? Piss off!" So let's say you instead give a healthy percentage: at $100 per unit, all of a sudden you're filling your halls with addicts and derelicts that are doing everything they can to fake a blood test which drives away the people you want to donate. Meanwhile, you're taking a "favor" transaction and turning it into a "business" transaction which sets the value for both parties at whatever you arrive at: "We're paying you $20, we don't have to treat you nicely." "Screw this, it's not worth putting up with this bullshit for $20." If you instead leave it as an intangible, both parties get to set their price in "warm fuzzies" - "I helped save a life and got all the juice and cookies I wanted." "The world is full of generous people who give of their own bodies for free." The California Bar Association saw their volunteer enrollment jump a thousand percent when they dropped their recommended fees from "25% of your hourly rate" to "nothing." As it turns out, people who get a free lawyer tend to treat them with respect, while people who get a lawyer for 75% off tend to treat them as if they got them full price. Meanwhile, lawyers who work for free feel like they're doing good, while lawyers who work for 75% off feel like they're getting ripped off.
I read the free chapter and had some issues with it -- I think I vented to _refugee_ about it -- but it was interesting and I would like to read the rest. Non-financial incentives are important too. Here's the Freakonomics example: ...Uri ran an experiment: Out of 10 daycare centers across Haifa, they randomly chose six and introduced a small fine for parents who showed up more than 10 minutes late in each of them. In day cares where the fine was introduced, parents immediately started showing up late, with tardiness levels eventually leveling out at about twice the pre-fine level. That is, introducing a fine caused twice as many parents to show up late. What about the remaining four day care centers that remained fine-free? Tardiness didn’t change at all. The picture that emerged from this experiment, co-authored with Aldo Rustichini, was that parents had a whole set of non-financial incentives for being on time – incentives that were completely incompatible with money. Like, for example, avoiding the guilt of inconveniencing the day care workers. As soon as parents had the option to pay a small fine and avoid that guilt, they took it en masse. The current arrangement seems to be working out with blood; it doesn't sound like there is a shortage. (Though distribution appears to be very much market-based once it is collected, and judging from the effort the Red Cross makes to guilt me into keeping them out of the red, they are well-motivated.) The argument for a kidney market is stronger. In fact, it's a slam dunk. I've been wanting to post about it, and will probably get around to it next year.In Haifa, day care centers almost uniformly closed at 4pm, and simply depended on the good intentions of parents to pick up their kids on time. Somehow, this worked: parents picked up their children on time and rarely, if ever, came after 4:30pm.
And I have issues with Freakonomics: they excel at doing a surface-level read of research, finding something to pick at, blow it completely out of proportion and sit back feeling clever about themselves. They're asses. That study, for example: Daycare cost: $380/mo = 8.5h/day x 5 days x 4 weeks = 170hrs = $2.23/hr Fine: $2.71 per child for any infraction over 10 minutes See, and none of that comes up when the Freakonomics guys bring it up. They just say "a small fine." They don't say "more than the hourly rate if you're 11 minutes late." It's like the serfs in the middle ages who went on pillaging sprees as soon as they were guilty of a nominal crime: if you're going to be executed anyway, might as well make it worth it. Know how many times I've been 11 minutes late to pick up my daughter? If you're going to hit me with the hourly for 11 minutes but nothing more for an hour or two, I'm getting some errands done. After all, I'm paying for it. These are the sorts of things Kahneman and Ariely study, but the Freakonomics guys just go "herp derp academics are stupid just look at this double-digit n study done out of that bastion of behavioral economics, UC San Diego!"
I think your concern about Levitt and Dubner is legitimate, though it would be more so if they published in Nature rather than blogging to Paul Krugman's audience. The authors of the daycare study described the fine as "relatively small but not insignificant." Whatever the size of the fine, it still prompts the question of why customers consume more of a service when the price changes from zero to something positive. The answer seems to be that a monetary incentive drowns out non-monetary incentives, like guilt. As Dan Ariely puts it in Chapter 5: I give Freakonomics credit for tricking people like me into realizing that economics is pretty interesting. Sumo wrestlers cheat, prostitutes use pricing strategies, drug empires operate like corporate empires. The ideas that incentives matter and unintended consequences are ubiquitous are important and ought to be popularized. And Iran is, therefore, the case study. Apparently at one point there was a waiting list for kidneys in Iran: the donors had to wait for a ready recipient.the theory of demand is a solid one—except when we're dealing with the price of zero. Whenever the price is not part of the exchange, social norms become entangled.
Kidney sales are legal in Iran.
Making you realize that economics is interesting is fine. They stop the minute they've built up a shaky case that they have the answers, though. "There is no Kitty Genovese effect." "Global warming is solved." "The possession effect doesn't exist." They're asses.