When I was a teenager in Belgium, my parents wanted to make sure that I wouldn’t become a smoker. At the age of 15, I had tried a few cigarettes with friends and they were worried I would pick up the habit. They could have organized a complicated system of surveillance and sanctions to monitor and prevent my smoking behavior. Instead, my dad offered me a very simple deal: “if you are not smoking by the time you graduate from high school, I will pay your trip to a destination of your choice in Europe during the summer before you start college”. My dad’s deal worked well: I took a great trip to Greece – my first flight – with a few friends and I have never smoked after those first cigarettes at 15.
Let’s think more carefully about the deal my dad made with me. First, why did he do it? Sure, they are loving parents and they knew that smoking is addictive and would be harmful to my health and to my wallet. But at age 15, I knew that as well: that smoking was endangering health was clearly written on cigarettes packs and we had attended smoking prevention sessions in high school. Still smoking was very common among my friends and any place we would go out to in the evening, in bars and at parties, was smoke-filled. We expect rational and reasonable individuals to use the information about the risks of tobacco and decide not to smoke. But most teenagers are not always reasonable, especially when facing peer-pressure, and smoking is addictive: once you have started, it’s really hard to quit. In behavioral economics terms, we would say that teen rationality is bounded. So, my parents thought that my decision process needed some guidance and they used an incentive to nudge me in the right direction. This can be seen as paternalistic, but isn’t that what parenting is about?
I am sure my parents focused first on my own health, but they might have also thought about the well-being of others when they incentivized me to not smoke. I am the first of three brothers, so my behavior would likely be an example, good or bad, for my siblings. They might have anticipated that one day I would start a family and tried to prevent second-hand smoke for their grandchildren. They reasoned that by influencing my behavior, it would indirectly benefit others. In economic parlance, we would say that they realized that smoking was creating a negative externality, and they used a financial incentive to help me internalize the cost I would have imposed on others by smoking.
Finally, like with many other risky behaviors such as drugs, alcohol, unsafe sex or unhealthy diet, the issue with smoking is that there is a time disconnect: the enjoyment of the cigarette is immediate while the negative consequences reach far in the future. Indeed, most smokers do not experience severe health consequences before they are in their 50s or 60s. By offering me a trip conditional on not smoking towards the end of my teenage years, my father brought the benefit of smoking abstinence much closer to the present. His calculation was quite clever: he knew that most teenagers start smoking before age 18 and that if I had made it smoke-free by then, the chances that I would start later would be small.
In a recent working paper, I review the use of financial incentives to prevent undesirable behaviors. I go beyond smoking to cover other risky behaviors such as unsafe sex and HIV prevention, obesity, alcohol and drug use and even early marriage. I discuss how financial incentives can influence undesirable behaviors through three mechanisms which are linked to the three reasons explaining their prevalence: externalities, bounded rationality and resource constraints.
By linking his offer to pay for my summer trip to the fact that I was not smoking, my father made it more expensive for me to smoke. If I had been smoking by the time I was graduating from high school, I would have lost that reward and either stayed home or worked more to travel. This price effect allowed the negative externality caused by my smoking behavior to be internalized. The incentive also helped to overcome my “bounded rationality” as a teenager: impulsive decisions, vulnerable to peer pressure and to addiction, discounting the health consequences of tobacco far into the future.
The income effect from the incentive might relax the resource constraints that prevent people to engage in less risky behaviors. This income effect is not obvious for those behaviors which are costly to the individuals such as smoking, alcohol or drug consumption. In those cases, people would save by quitting the behavior. But a cash transfer could, for example, help households buy healthier food or pay for gym membership. In the case of unsafe sex, the direction of the income effect might vary with gender. For some lower income women, the transfer could indeed ameliorate immediate economic pressures to engage in transactional sex.
In the rest of the paper, I review the evidence from several examples of incentives which have been used and evaluated to prevent undesirable behaviors. I also address one very legitimate question about these financial incentives: how sustainable are they in the long-term? In other words, will the beneficiaries need to be incentivized life-long or for a long period to choose the safe behavior? I will focus on this question in the second part of this blog.