The existence of a motivational crowding-out effect has been proposed early on by Titmuss1, who in 1972, published a well known

study about blood donors, where he argued that the introduction of payment to blood donors could be counterproductive. Indeed, altruistic donors defected and were substituted by donors solely interested in the monetary rewards. A few years later, this empirical study began to have a theoretical basis among economic theory, through the seminal work of Bruno Frey on the crowding-out effect2. This theory begins with the distinction between intrinsic and extrinsic motivation. According to Herzberg3, the growth or motivator factors that are intrinsic to the job are: achievement, recognition for achievement, the work itself, responsibility, and growth or advancement. An activity is intrinsically motivated when it is done for its own sake, i.e., due to interest in or fun from the activity in question or to an adherence to internalised norms. The dissatisfactionavoidance or hygiene factors that are extrinsic to the job include: company policy and administration, supervision, interpersonal relationships, working conditions, salary, status and security4. An activity is extrinsically motivated when it is instrumental in obtaining some result which lies outside the activity itself5. Herzberg disputed the idea that motivation was all about money and other rewards, and emphasised just how important it is for people to have their personal needs recognised and met if they are to becommitted to their work. Frey also explained that intrinsic motivations could be eroded by the promotion of extrinsic (usually pecuniary) ones. The transformation of the social relationships resulting from such promotion may induce then an overall inefficient effect. Intrinsic motivations are then crowded out by extrinsic ones. If this crowding-out effect holds, the opposite of one of the most fundamental economic laws may well be observed: raising monetary incentives can reduce, rather than increase, effort 6.

That external interventions may under some conditions crowd-out intrinsic motivation has long been well established in economics. It represents a particularly

important anomaly to standard economics because it proposes an effect working in the opposite direction to the fundamental relative price effect: when monetary compensation is increased performance decreases (rather than increases) if the crowding-out effect proves stronger than the relative price effect. The crowding-out effect is of obvious importance for compensation policy 7. Weibel et al. (2007) also stated that financial rewards can simultaneously affect extrinsic motivation positively, through the price effect, and intrinsic motivation negatively, through the hidden costs of reward or the crowding-out effect. Behaviour is usually both intrinsically and extrinsically motivated: it is the combined effect of both which produces the total effect8. Fairness, trust and reciprocity are known to be relatively fragile in the presence of explicit incentives. This is especially true if incentives are provided via a threat of punishment. Fehr and Rockenbach (2003) impressively show that if a principal deliberately chooses a punishment incentive scheme, performance of agents is considerably reduced. Also, in order to have positive reciprocity dynamics the existence of trust among individuals is essential: if they believe that others are inclined to cooperate, individuals cooperate in turn. In such a context, the simple existence of an incentive scheme can be seen as a signal that other individuals are not trustworthy: if they were, incentives would be unnecessary9. Crowding-out effect can also appear as the result of monitoring. The study Dickinson and Villeval made in a real-task laboratory experiment, recognise the pertinence of the crowding-out theory in the monitoring efforts inside the firm. Particularly if there are distributional concerns involved, that may undermine trust among principals and agents, the effort of workers diminishes. For the authors, such effect indicates that there should be an equilibrium level for the disciplining effect of monitoring10. Explanations for crowding-out are usually psychological. They are explained as: (1) Peoples desire to keep control of themselves and their tendency to define themselves through their activities. (2) Peoples intrinsec motivation is not acknowledged if payment is offered, and that their envolvement and competence are not appreciated11. According to Frey12, there are two psychological conditions under which the crowding-out effect appears:

(1) External interventions crowd-out intrinsic motivation if the individuals affected perceive them to be controlling. In that case, both self-determination and self-esteem suffer, and the individuals react by reducing their intrinsic motivation in the activity controlled. (2) External interventions crowd-in intrinsic motivation if the individuals concerned perceive it as supportive. In that case, self-esteem is fostered, and individuals feel that they are given more freedom to act, thus enlarging self-determination. We can thus conclude that extrinsic motivation has some serious drawbacks: 1. Its not sustainable - As soon as you withdraw the punishment or reward, the motivation disappears. 2. You get diminishing returns - If the punishment or rewards stay at the same levels, motivation slowly drops off. To get the same motivation next time requires a bigger reward. 3. It hurts intrinsic motivation - Punishing or rewarding people for doing something removes their own innate desire to do it on their own. From now on you must punish/reward every time to get them to do it.

Notes: 1.Titmuss, R. (1972) The Gift Relationship. From Human Blood to Social Policy, New York, Vintage Books. 2.Frey, S. Bruno (1997) Not Just for The Money. An Economic Theory of Personal Motivation. The crowding-out theory was also analyzed in the working paper: Frey, S. Bruno and Jegen, Reto (2001) Motivation Crowding Theory: A Survey of Empirical Evidence, Journal of Economic Surveys, vol.15 (5), 589-611. 3.Herzberg, F. (2003) One more time: How do you motivate employees?Best of HBR. 4.Ibid. 5.Weibel, A., Rost, K. & Osterloh, M. (2007) Crowding-Out Of Intrinsic MotivationOpening The Black Box, Working Paper, University of Zurich. 6. Frey, S. Bruno and Jegen, Reto (2001) Motivation Crowding Theory: A Survey of Empirical Evidence, Journal of Economic Surveys, vol.15 (5). 7. Torgler, B., Frey, S. B., Schaffner, M. and Schmidt, S., L. (2008) A Crowding-Out Effect for Relative Income, Discussion Paper and Working Paper Series, QUT School of Economics and Finance. 8. Weibel, A., Rost, K. & Osterloh, M. (2007) Crowding-Out Of Intrinsic MotivationOpening The Black Box, Working Paper, University of Zurich. 9. James, Harvey (2002) The trust paradox: a survey of economic inquiries into the nature of trust and trustworthiness, Journal of Economic Behaviour and Organization, 47. 10. Dickinson, David and Villeval, Marie-Claire (2004) Does Monitoring Decrease Work Effort? The Complementarity Between Agency & Crowding-Out Theories, IZA Discussion Paper n 1222. 11. Bolle, Friedel (2007) A price is a signal on intrinsic motivation and crowding-out, European University Viadrina Frankfurt, Department of Business Administration and Economics, Discussion Paper No. 250. 12. Frey, S. Bruno and Jegen, Reto (2001) Motivation Crowding Theory: A Survey of Empirical Evidence, Journal of Economic Surveys, vol.15 (5).