Finding the right levers: the serious side of 'economics made fun'

Journal of Economic Methodology 19 (3):199-217 (2012)
Abstract
The serious side of the Economics Made Fun genre stems from its mantra that people respond to incentives. As Levitt and Dubner put it, economists typically believe they can solve virtually all problems by designing a proper incentive scheme. What is not always sufficiently appreciated is that Levitt and Dubner argue that economists nowadays grant the existence of social and moral incentives, besides the standard economic ones. A glance at the relevant literature in academic economics confirms this. Although there is an ongoing debate in academic economics about the necessity and desirability of introducing social preferences in utility functions and also about the relative strengths of various sorts of preferences, economists increasingly take the existence of various sorts of incentives and motivations into account. The recognition of non-monetary incentives and of non-economic motivation makes the economic approach to policy making more comprehensive and flexible. But since there might be various kinds of interaction effects between different sorts of incentives and different sorts of motivations, it also vastly complicates devising optimal policy schemes. What Levitt and Dubner say almost in passing about the ?strange nature? of incentives also reflects the present state of art in academic economics: while it is increasingly acknowledged that different sorts of incentives and different sorts of motivations might interact in various ways, little is still known about when, under what conditions, the one or the other interaction effect obtains. Yet knowledge of the latter is required to devise optimal incentive schemes. Thus even though Levitt and Dubner might be right that economists are quite confident that they can solve virtually all problems by devising optimal incentive schemes, it seems the limited understanding of incentives, motivations and their various interaction effects in present-day academic economics falls short of bolstering this confidence
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