Persistence or reversal? The micro-effects of time-varying financial penalties

Abstract

Many financial incentives are time-varying due to the presence of time-limits, benefit ceilings and/or penalty thresholds. The potentially perverse effects of providing and then withdrawing financial incentives are now well-known. Whether or not these potentially perverse effects extend to other patterns of temporal variation remains unclear. The present study investigates the impact of temporal variation on the overall effectiveness of financial penalties for risky driving behaviours. Based on secondary analysis of data from a randomised field experiment, we find evidence for reductions in the target behaviour (relative to control) rather than habit persistence when penalties were temporarily ‘switched-off’. These behavioural reversals during ‘off’ weeks in a (significant) minority of participants were large enough to completely offset the positive effects of financial penalties during ‘on’ weeks. Reductions in the strength of financial penalties further undermined their effectiveness; leaving affected participants (and society) worse off than if we had done nothing at all. For safe driving and perhaps also for other behaviours where intrinsic and extrinsic motivations come into conflict, efforts to limit the potential for ‘switch off’ and maintain the strength of financial penalties (for example, by using personalised and adaptive design) should yield improvements in their effectiveness and cost-effectiveness.