The Cost of Price Incentives: An Empirical Analysis of

Motivation Crowding-Out

By BRUNO S. FREY AND FELIX OBERHOLZER-GEE *

Twenty-six years ago, Richard M. Titmuss(1970) claimed that monetary compensationtends to undermine an individual’s sense ofcivic duty. He illustrated his claim with blooddonations, contending that paying donors neg-atively affects their willingness to donateblood. This thesis attracted considerable atten-tion. Among others, Robert S. Solow (1971)and Kenneth J. Arrow (1972) discussed theproposition, both assuming that the effects ofprice incentives can simply be addedto thoseof altruistic donation. Contrary to Titmuss,economists therefore generally predicted thatif the price of bloodis raised, the total quantityoffered would increase in accordance with anormal supply function of blood.

This discussion subsided rather quickly be-cause there was neither an analytical frame-work nor convincing empirical evidence tosupport Titmuss’s case. Today, new theoreti-cal developments suggest that economistsshould considerpossible detrimental effects ofusing price incentives. In this paper, we pres-ent such a theory whichis derived from socialpsychology and focuses on the crowding-outof intrinsic motivation.It stipulates that intrin-

* Institute for Empirical Economic Research, Univer-sity of Zurich, Bluemlisalpstrasse 10, 8006 Zurich, Swit-zerland (e-mail: bsfrey@iew.unizh.ch and oberholf@iew.

unizh.ch [for Frey and Oberholzer-Gee, respectively ]).This paper is part of a research project on the siting ofnoxious facilities financed by the Swiss National Fund(Grants Nos. 12-25581.88 and 12-42480.94), which was

undertaken jointly with the late Werner W. Pommerehne,University of Saarbriicken. Weare grateful to Iris Bohnet,

Reiner Ejichenberger, Paul Kleindorfer, Howard

Kunreuther, Beverly Lew, and three anonymousrefereesfor valuable comments, and to Mary Brinton, James

Coleman, Harald Demsetz, Sam Peltzman, Sherwin

Rosen, George Stigler, Lester Telser, Burton Weisbrod,

Oliver Williamson,and, in particular, to Gary Becker, for

helpful discussions. Preliminary versions were presented

in seminars at the Universities of Basle, Humboldt Berlin,

Bern, Cambridge, Constance, Chicago, Northwestern,

Pennsylvania, and Saarland.

746

sic motivation is partially destroyed whenprice incentives are introduced. Consequently,the price mechanism becomesless effective.In someinstances,the relative price effect mayeven be reversed, 1.e., a price increase mayre-duce supply. Based on this framework, wepresent an econometric test of motivationcrowding-out for an importantreal-life issue,the siting of locally unwantedprojects (the so-called ‘‘Not In My Backyard’’ or NIMBYproblem).

Section I provides a short overview ofCrowding Theory applied to the siting of lo-cally unwanted facilities. In Section II, wepresent a case study where increasesin finan-cial compensation lessened the willingness tohost a noxiousfacility. As is shown in SectionIII, this reduction is due to motivationcrowding-out. The final section contains con-clusions for theory and policy.

I. The Motivation Crowding Effect: Theory

Human behavioris influenced by both ex-trinsic and intrinsic motivation. The former isactivated from the outside. In particular, indi-viduals follow the generalized law of demand.Intrinsic motivations, on the other hand,relateto activities one simply undertakes becauseone likes to do them or because the individualderives somesatisfaction from doing his or herduty.

Social psychologists have argued that thereare ‘‘hidden costs of reward’’ (Mark R.Lepper and David Greene, 1978), and thatmonetary rewards may reduce intrinsic moti-vation (surveys are given in Edward L. Deciand Richard M. Ryan, 1985; Robert E. Lane,1991). From a rational choice point of view,this reduction of intrinsically motivated activ-ities is straightforward (Frey, 1994): If a per-son derives intrinsic benefits simply bybehaving in an altruistic manneror bylivingup to her civic duty, paying herfor this service

VOL. 87 NO. 4

reduces her option of indulging in altruisticfeelings. Her intrinsic motivation then has areduced effect on supply. There is a psycho-logical process which underlies this phenom-enon: Where individuals perceive an externalintervention to be controlling, their intrinsicmotivation to perform the task diminishes(Deci and Ryan).

Weapply this Crowding Theory to NIMBYprojects. These projects are often socially de-sirable undertakings (they increase overallwelfare), but they impose considerable netcosts on their immediate neighbors. Conse-quently, citizens demand the completion ofsuch projects, but refuse to have them locatedin their vicinity. Examples include incinera-tors, airports, prisons, or clinics for the phys-ically or mentally handicapped. Recentexperience in mostindustrialized countries in-dicates that it is generally not possible to buildsuch facilities without local consent (DouglasEasterling and Howard Kunreuther, 1995 p.6). Economists have a handy tool for solvingNIMBYproblems. As the aggregate net ben-efits of undertaking the project are positive,one must simply redistribute them in an ap-propriate way. Economic theory suggests thatcommunities can be induced to accept the un-desired project by compensating them in sucha way as to maketheir net benefits positive,while all other communities must be taxed toraise the sum of compensation.'

More formally, an individualliving in a pro-spective host community choosesthe level ofsupport (S) that maximizes his expected netbenefits

(1) max{p(S)[B-C+E]

+ D(E,S) — K(S)}.

' Michael O’Hare (1977) wasthefirst to suggest the

use of monetary compensation as a means to overcome

the siting problem. Since then, a large literature hasevolved. The search for locations for noxiousfacilities in

the United States is discussed by Robert Cameron Mitchell

and Richard T. Carson (1986), Kunreuther and Easterling

(1990), and James T. Hamilton (1993). Kunreuther and

Paul R. Portney (1991) and Arthur O’Sullivan (1993)

contain theoretical considerations. Joanne Linnerooth-

Bayeretal. (1994) and Oberholzer-Geeet al. (1995) pres-

ent European casestudies.

FREY AND OBERHOLZER-GEE: THE COST OF PRICE INCENTIVES 747

Support for a NIMBYfacility may consistof,e.g., participating in referendums, attendingand organizing information meetings, or col-lecting signatures. S is defined as an index ofsupport whichincludesall activities that influ-ence the probability (p) of successful siting.Weassumethat in a referendum,an individualvotes in favor of a noxiousfacility if S is pos-itive. B represents the benefits associated withthe facility (e.g., gain in employment, positivetax effects), C denotes the negative external-ities such as health risks, lower property val-ues, Or environmental hazards, and E is theexternal monetary compensation that the in-dividual will receive if the prospective hostcommunity allows the construction of theplanned facility.” As expected net benefits en-ter the individual decision calculus, (B — C +FE’) is weighed with the probability of success-ful siting (p). Noxious facilities are morelikely to be built in communities with higherlevels of support (Hamilton). Therefore, themore a representative citizen increases hislevel of support (S') for the noxious facility,the more likely it is that the project will belocated in his hometown,but there are decreas-ing returns (ps > 0, pss < 0). In addition tothese economic effects, intrinsic motivationmay also play a role. This motivation consistsin the willingnessto contribute to the solutionof pressing national or regional problems. Callthe benefits of performing one’s so-definedcivic duty D.* It increases with the level ofsupport for the siting of the facility in question,but there are diminishing returns (D,; > 0,Ds; < 0). As outlined above, external com-pensation tends to crowd out intrinsic moti-vation (Dz; < 0). Finally, participating inreferendumsandother formsof support for thefacility represent costly activities. These costsare denoted as K and have the conventionalproperties (K; > 0, Ks; > 0).

* The compensation paymentis ‘‘external’’ in the sensethat the moneyis not used to changethe characteristics ofthe facility in any way. We envision the monetary rewardto be paid out in cashtoall the citizens living in the host

community for efficiency reasons.* Other terms such as ‘‘public spirit’’ are used to con-

vey the same notion. An extensive discussion of these con-cepts with references to empirical findings is provided byJane Mansbridge (1994).

748 THE AMERICAN ECONOMIC REVIEW

Wefirst consider a situation where the neg-ative externalities outweigh the benefits asso-ciated with the facility (B — C < 0) and thedeveloper offers no monetary compensation(E = 0). This is the starting point for manysiting disputes (Barry G. Rabe, 1994). A ra-tional citizen choosesthe level of support S*that maximizeshis net benefits. This yields thefirst-order condition

(2) pslB- C+ E]+ Dy, — K; =0.

In manycases,the resulting equilibrium sup-port S* is insufficient for successful siting.*The developer may then seek to muster addi-tional support by offering monetary compen-sation, thereby making expected net benefitspositive (B — C+ E > 0). Differentiating (2)with respect to external compensation E indi-cates how the citizen’s optimal level of supportis affected

dS*(3) dE

_ Ds + Dsg

—[ pss(B — C + E) + Dss — Kes]

= 0.

Asthe denominatorin (3) is positive, the over-all effect of compensation on equilibrium sup-port hinges on the sign and magnitude of p;and D;;. Conventionally, external compensa-tion does not affect intrinsic motivation, Dy =O. This yields the standardrelative price effect(ps > 0): An increase of monetary compen-sation unequivocally increases equilibriumSupport S$*.

In contrast, the crowding-outeffect consid-ered here leads to Ds; < 0: Monetary rewardsundermine intrinsic motivation, and the mar-ginal benefit of supporting the siting is low-

* The required level of support mainly dependsonin-

stitutional factors such as siting laws or the possibility foreminent domain. In many countries, construction permits

for noxiousfacilities must be approved in local referenda.In these cases, the level of support is insufficient if S* is

negative for more than 50 percent of the voters.

SEPTEMBER 1997

ered. Provided the motivation crowding-outeffect dominatesthe standard relative price ef-fect, the external monetary intervention re-duces a citizen’s optimallevel of support, dS*/dE < 0. Thus, acknowledging motivationcrowding-out does not mean that monetary re-wards do not work. However, using price in-centives becomes more costly becauseincreased support due to higher monetary in-centives must be traded off against losing sup-port due to crowding-out. This yields

Hypothesis I: When local residents perceiveit as their civic duty to accept a NIMBYproj-ect, introducing monetary compensation re-duces the support for the noxiousfacility if thecrowding-out effect dominates the relativeprice effect.

II. Empirical Test

Hypothesis 1 is tested by analyzingthere-action of Swiss residents to monetary compen-sation offered for the acceptance of a nuclearwaste repository.

A. The Survey

The Swiss governmentintends to build tworepositories to store nuclear waste. For low-and mid-level radioactive wastes, two adjacentcommunities located in central Switzerlandhave been designated as potential sites. Inspring 1993, 305 interviews were conductedin these communities by a professional surveyinstitute, covering more than two-thirdsofallhouseholds. Before selecting individual re-spondents, quotas (number of interviewees)with regard to age, sex, and the level of edu-cation were specified. With respect to thesecriteria, both subsamplesare representative forthe communities where interviews were con-ducted. Next, individual respondents were se-lected, using a random selection process basedon registration lists of Swiss residents.As recommended by the National Oceanic

and Atmospheric Administration (NOAA )panel chaired by Arrow and Solow(Arrow etal., 1993), we conducted in-person interviews(at the respondents’ homes). The contingentvaluation (CV) questions utilized the refer-endum format (W. Michael Hanemann, 1994;

VOL. 87 NO. 4

Portney, 1994).° The present study is bestthought of as representing how people wouldvote if they had to decide on siting a nuclearwaste repository in their hometown. There iswide agreement that a CV study should beconsidered ‘‘essentially a self-contained ref-erendum ...’’ (Arrow et al., 1993 p. 4606).Indeed, careful CV studies have correctly pre-dicted ballot votes (Carson et al., 1986). How-ever, we agree with the critique by Peter A.Diamond and Jerry A. Hausman (1994) whoargue that this optimistic view of CV cruciallyhinges on the assumption that survey respon-

dents possess the same information as voters.Besides including a detailed description of thesiting procedure and the compensation mech-anism in the survey, we therefore followed anovel approach: Wechoseto conductthe sur-vey one weekprior to an actual referendum onan amendment to the canton constitution re-garding the construction of undergroundfacil-ities and nuclear waste repositories. At thetime of the survey, the issue had been debatedextensively and wefeel confidentthat the levelof information correspondedto a typical ref-erendum situation.

B. Test of the Hypothesis

Weaskedall respondents if they were will-ing to permit the construction of a nuclearwaste repository for short-lived, low- and mid-level radioactive waste on the groundsoftheircommunity (Question 1, Appendix).° Morethan half of the respondents (50.8 percent)

> The questionnaire was developedwith the help of sur-vey research specialists of the Zentrum fiir Umfragen inMannheim, Germany. The final version of the question-naire was pretested with 50 respondents living in com-munities adjacent to the ones selected for the survey. Inan extensive debriefing session, we madesure test respon-

dents understood the questions posed duringthe interview.

° The initial sections of the survey contained a detaileddescription of the facility and the siting procedure. Next,respondents answered a numberof questions regarding the

expected costs and benefits (probability of accidents, ex-pected consequencesif an accident occurs, economic im-

pacts of the facility). The goal was to have respondents

carefully think aboutall sorts of expected costs and ben-efits associated with the repository. Then, Question 1 of

the Appendix followed. The procedure described in the

questionis identical to the one actually employed in Swit-

FREY AND OBERHOLZER-GEE: THE COST OF PRICE INCENTIVES 749

would have voted in favor of having the nu-clear waste repository built in their commu-nity, 44.9 percent opposedthe facility, and 4.3percent did not care.’ Thus, this NIMBYproj-ect received widespread support although itwas mostly viewed as a heavy burden for theresidents of the host community: Nearly 40percent of all respondents believed the risk ofserious accidents in the facility and ground-water contamination to be considerable.Thirty-four percent were convinced that somelocal residents would die as a result of anyenvironmental contamination, and nearly 80percent believed that many local residentswould suffer long-term effects should any ac-cident occur.To test the effect of external compensation,

we repeated the exact same question askingour respondents whether they were willing toaccept the construction of a nuclear waste re-pository when the Swiss parliament had de-cided to compensate all residents of the hostcommunity (Question 2, Appendix). Theamount offered varied from $2,175 per indi-vidual and year (N = 117) to $4,350 (N =102) and $6,525 (N = 86).® While 50.8 per-cent of the respondents agreed to accept thenuclear waste repository without compensa-tion, the level of acceptance dropped to 24.6percent when compensation was offered.About one-quarter of the respondents seem toreject the facility simply because of financialcompensation. The amount of compensationhad no significant effect on the level of

zerland. In order to build a repository, the developer (NA-

GRA), the federal parliament, and the local town hall

meeting all have to agree on the project.‘Tn the actual referendum which was held one week

after the survey, a slight majority voted against a propo-sition that would have given the electorate the right todecide on construction permits for all underground facil-ities in the canton (not only nuclear waste facilities, butother civil construction projects as well). Unfortunately,the outcome of this referendum cannot be directly com-

pared to our survey results because the propositions were

not identical and the surveypertains to the communal and

not to the cantonal level. However, our general impression

that there are about as many proponents as opponents ofa nuclear waste facility in Nidwalden is confirmed by theactual referendum outcome.

® The compensation offered here is quite substantial.Median household incomefor our respondents is $4,565per month.

750 THE AMERICAN ECONOMIC REVIEW

acceptance.” Everyone whorejected thefirstcompensation was then made a better offer,thereby raising the amount of compensationfrom $2,175 to $3,263, from $4,350 to $6,525,and from $6,525 to $8,700. Despite thismarked increase,only a single respondent whodeclined the first compensation was now pre-pared to acceptthe higheroffer.To further test the crowding-out effect, we

conducted an identical survey in northeasternSwitzerland, namely in six communities thatare designated as potential sites for the secondSwiss repository, a facility for long-lived,highly radioactive wastes. Two hundredsix in-terviews were conducted in these communi-ties.'° The sampling procedure and surveymethodology were identical to the one de-scribed above. Forty-one percent of these re-spondents stated they would vote for thehigh-level radioactive waste facility, 56.4 per-cent would have voted againstit, and 2.6 per-cent did not care. When offered compensation,the level of acceptance dropped to 27.4 per-cent. Again, variations of the financial incen-tives did not result in significant changes ofthe supportive votes.These findings are not unique to Switzer-

land. Kunreuther and Easterling (1990) reportthat increased tax rebates failed to elicit in-creased support for a nuclear waste facility inNevada (N = 498). They reject the possibilitythat the rebates offered were simply too small.Similar results concerning nuclear waste re-positories are reported by S. A. Carnesetal.(1983) for Wisconsin (N = 420), by Riley E.Dunlap and Rodney K. Baxter (1988) forWashington State (N = 658), and by EricHerzik (1993) for Nevada (N = 1212).

? Acceptance rates were 24.3 percent when $2,175 was

offered, 24.8 percent with $4,350, and 24.7 percent with$6,525.

'° Unfortunately, there was no pending referendum innortheastern Switzerland. Thus, the information level of

respondents maynot have exactly correspondedto the oneright before a referendum. However, seismic measure-ments conducted by the developerin all six communitieshad caused a considerable discussion amongst the resi-dents before the survey was conducted.

SEPTEMBER 1997

C. Competing Explanations

While the above results correspond toCrowding Theory,there are two alternative in-terpretations of the observations.1. Strategic Behavior. Since our observationsrelate to a real-world problem, we cannotruleout that the respondents answeredstrategi-cally. In order to maximize the amount ofcompensation received from the central gov-ernment, the citizens would understate theirwillingness to accept the repository. In thiscase, opposition should be greatest when nocompensation was offered. This is just theopposite of what actually occurred. Further-more, when asked whythey declined thecompensation offered, only 4.9 percent of therespondents indicated that the amount wasin-sufficient to win their approval (Question 3(a), Appendix ).'’ Therefore, strategic behav-ior can be ruled out for the majority of therespondents.2. Signaling. Citizens may takethe offer of agenerous compensation as an indication thatthe facility is more hazardous than they pre-viously thought. A higher compensationshould then lead to a higher risk evaluation,and ceteris paribus to a lowerlevel of accep-tance. We have tested this competing expla-nation by directly asking the respondentswhetherthey perceived a link between the sizeof the compensation and the level of risk(Question 3 (b), Appendix ). Only 6.3 percentagreed with this connection which clearly re-futes the risk-signaling hypothesis. '*

III. Determinants of Support

It could be argued that the public’s reactionto nuclear facilities and similar sourcesof riskis highly emotional, sometimesevenirrational(Stephen Breyer, 1993 pp. 33-39). In partic-ular, one might suggest that compensationdoes not work since such facilities are notevaluated in terms of costs and benefits. In this

'' For the high-level radioactive waste repository, 5.8percent regarded the size of the compensation asinsufficient.

'? For the high-level radioactive waste repository, 6.9percent agreed.

VOL. 87 NO. 4

section, we test a rational choice explanationof our survey data and link the observed de-cline in support to the crowding-out of civicduty.

In accordance with the theory outlined inSection I, an increase in costs (risks, negative

economic impacts, losses in property value)reduces the individual willingness to supportthe repository. Individual estimatesofall threecost variables were collected in the survey. Weexpect these covariates to be negatively cor-related with the willingness to accept the fa-cility. Previous research supports theseexpectations (Easterling and Kunreuther,1995). It has also been shownthatthe generalattitude towards nuclear power'* (James H.Flynn et al., 1990) and the perceived qualityof the site selection process(Easterling, 1992)influence the willingness to host a waste re-pository. We test for the effects of both vari-ables. Our modelfinally includes a number ofpersonal characteristics such as political ori-entation, income, age, and sex as control

variables.

Table 1 reports the results of a binary logitanalysis which seeks to explain whyindivid-uals accept a nuclear waste facility. The de-pendent response are ‘‘accept’’ answers.Those whodid not care about the constructionof a nuclear waste repository were omittedfrom the analysis.

The predictive power of our model (columnI, without compensation) is quite satisfactory.Eighty percent of all answers are predictedcorrectly. '* Theresults of the binary logit anal-

'* We measured the degree of support for nuclear en-

ergy by asking respondents how they would vote in a na-

tional referendum on a proposition which demanded tostop producing nuclear energy. Such a proposition wasactually put to a national referendum in 1990 and wasnarrowly defeated. As such initiatives are quite frequent,Swiss voters are accustomed to making decisions regard-ing nuclear power.

'* This approximately represents a 30-percent gain incorrectly predicted answers comparedto a completely ran-

dom model whichassigns each observation the same prob-

ability of acceptance. Likelihood ratio tests of the null

hypothesis thatall coefficients except the constant are zeroreject these hypotheses. Estimate I: 2[LL(N)-LL(0)] =

207.801 with 9 degrees of freedom, chi-square p-value =

0.000. Estimate II (see discussion below): 2[LL(N)-

LL(0)] = 36.714 with 9 degrees of freedom, chi-square

FREY AND OBERHOLZER-GEE: THE COST OF PRICE INCENTIVES 751

ysis correspondto ourtheoretical expectationsand previous empirical findings. Higher per-ceived risk, negative economic impacts, andownership of a homeall decrease the willing-ness to host a nuclear waste repository. Thisrefutes the notion that individuals do not actrationally when confronted with nuclear wastefacilities. The costs a facility imposes on itsimmediate neighbors largely explain their re-sistance.'° Personal characteristics such as po-litical orientation, income, age, education, and

sex do not exercise any significant influence.Asdoesearlier siting research, we also find

that the general support for nuclear energy andthe quality of the site selection procedure pos-itively influence the willingness to accept therepository. Previous studies have not paidmuch attention to these relationships. On thecontrary, it was generally taken as a matter ofcourse that supporters of nuclear energy aremore likely to accept waste facilities. Judgedfrom an economic perspective, however, thisfinding comesas a surprise. Given the privatecosts and benefits associated with the proposedproject, why should individuals be morewill-ing to accept the facility if they favor the tech-nology that generates the waste stream? It isoften arguedthat the production of nuclear en-ergy will not be continuedif the waste problemcannot be solved. However, even if the sup-porters of nuclear energy stand to gain muchas a group if a site is found and if the futureof nuclear energy is secured, accepting a wasterepository that imposes net costs on the hostsis a public good for each memberofthe group.

Assuming that individuals do not contribute topublic goods, economic theory predicts thatsupporters of nuclear energy are as likely asopponents to vote in favor of the repository.However, this prediction is empirically notborne out.

p-value = 0.000. Estimates for the high-level radioactivewaste repository yield the sameeffects.

'° Note that this econometric analysis is not a test ofcausality. The observation is compatible with the argu-

mentthat respondents opposethefacility for unknownrea-sons and simply claim it to be dangerous and costly

because they opposeit. Besides the fact that it might bedifficult to specify what these unknownreasons maybe,we think it improbable that all standard economic vari-ables in the modelare the result of reversed causation.

752 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1997

TABLE 1—-DETERMINANTS OF ACCEPTANCE TO Host A NUCLEAR WASTE REPOSITORY—RESULTS OF A LOGIT ANALYSIS Independentvariables Willingness to acceptfacility Willingness to acceptfacility

without compensation

with compensation

(1) (ID

Change in Changeinprobability of probability ofacceptance in acceptance in

Estimate percent Estimate percent(S.E.) (t-ratio) (S.E.) (t-ratio)

Constant 16.35 16.78(28.03) (22.85)

Individual risk estimate —0.72** —7.1** —0.28** —4,4**(“1 = very low’’ to ‘*6 = very high’’; (0.13) (—5.57) (0.11) (—2.54)

effect of 1-point increase reported)

Negative economic impacts —1.32** —13.0** —1.10* —17.5*Expected DY, 1 = yes, 0 = otherwise (0.45) (—2.95) (0.47) (—2.35)

Homeownership —1.25** —12.4** —0.59 —9.4DY, 1 = yes, 0 = otherwise (0.44) (—2.83) (0.32) (—1.79)

Political orientation 0.05 +1.0 0.13 +2.0(‘1 = left’’ to ‘*6 = right’) (0.14) (0.33) (0.12) (1.05)

Income —0.01 0 0.01 0$870 per month (0.04) (—0.33) (0.03) (0.12)

Age —0.01 0 —0.01 0(0.01) (—0.48) (0.01) (—0.66)

Sex —0.33 —3.2 —0.23 —3.6(Effect of being female) (0.39) (—0.84) (0.32) (—0.72)

General support for nuclear technology 1.13** +11.2** —0.21 —3.3DY, 1 = yes, 0 = otherwise (0.41) (2.76) (0.32) (—0.64)

Quality of current siting procedure 0.62** +6.2** 0.04 +1(‘1 = not acceptableat all’’ to ‘‘6 = (0.13) (4.95) (0.10) (0.42)

completely acceptable’’; effect of 1-point increase reported)

Notes: * = significant at the 95-percent level, ** = significant at the 99-percent level. The estimated coefficients can beinterpreted as the log of odds-ratios for a dichotomous independent variable. Since these coefficients are not an intuitivelymeaningful quantity, we provide derivatives indicating changesin the probability of accepting a nuclear waste repository.Holdingall independent variables at their mean value, these derivatives show the effect of point-for-point changes in asingle independentvariable on the probability of accepting a nuclear waste repository. Thus, the derivative for the riskvariable with a value of —7.1 percent can be interpreted as follows. If two respondents, A and B,differ only in their riskestimates, A estimating the risk to be 4 points (on a scale from 1 to 6) and B judgingit to be 5 points, the probability ofaccepting a nuclear waste repository is on average 7.1 percent lower for B than for A. If it were the only differencebetween A and B that the former owned his home while the latter did not, A’s probability of accepting a nuclear wasterepository would be 12.4 percent lower than B’s (derivative of —12.4 percent).

Wepropose to interpret this variable as aproxy for the prevailing level of public spirit.Civic-minded individuals do not only furthertheir personal goals, but are prepared to bearsome cost for the benefit of the larger group.In our case, feelings of civic duty create a will-ingness to accept the waste repository and se-

cure the benefits of nuclear energy for thegroup as a whole. Note that this does not implythat supporters of nuclear energy are morecivic-minded than opponents. On the contrary,as the latter generally do not believe that nu-clear energy is socially beneficial, feelings ofpublic spirit imply that they actively oppose

VOL. 87 NO. 4

this form of energy. In any case, as long aspublic spirit prevails, supporters of nuclear en-ergy are more likely to accept the waste facil-ity than opponents.A similar argument can be made with regard

to the quality of the site selection rule. Im-proved site selection processes identify saferlocations. They thus result in reduced negativeexternalities associated with the facility by rul-ing out, e.g., building waste repositories inswamp areas, or emitting carcinogenic sub-stances in densely populated regions. A su-perior site selection process does not onlyreduce the private negative externalities (forthe residents of the host community). It alsoleads to lower social costs because an accidenttypically affects the entire region or nation. Asabove, we proposeto interpret this variable asa measure of civic duty: Civic-minded indi-viduals care about the social impacts of theplanned facility. An improved site selectionprocess, which lowers the social costs of thenoxiousfacility, results in an increased will-ingness to host the repository because votersexpress their public spirit by advocating a so-cially beneficial project (for further empiricalevidence, see Douglas J. Lober and DonaldPhilip Green, 1994).'°

Interpreting the ‘‘General Support for Nu-clear Technology’’ and the ‘Quality of theCurrent Siting Procedure’’ covariates as prox-ies for the level of public spirit affords us theopportunity to further test Crowding Theory.Based on motivation crowding-out, we predictthat the positive influence of these two vari-ables weakensor vanishes once financial com-pensation is offered and public spirit iscrowded out. The following testable hypoth-eses are advanced.

Hypothesis 2: Compensation crowds out the(previously existing ) civic spirit of supportersof nuclear energy. After compensation has

'© Dunlap and Baxter (1988) tested this propositionmore directly. They found that 45.6 percent of the resi-dentslivingin thetri-cities area near Hanford, Washington

State, supported the construction of a high-level nuclearwaste repository in Hanford. When they were told thatHanford wasthe safest site available in the United States,

support for the repository increased from 45.6 percent to60.1 percent.

FREY AND OBERHOLZER-GEE: THE COST OF PRICE INCENTIVES 753

been offered, they are thusaslikely to vote forthe project as are the opponents of nuclearenergy.

Hypothesis 3: Due to crowding-out, the qual-ity of the site selection rule is no longer posi-tively correlated with the level of support forthe noxiousfacility when financial rewards areoffered.

Both hypothesesare tested in a model whichseeks to explain the determinants of accep-tance when compensationis offered (Table 1,

column II). As before, higher private costs de-crease the probability of acceptance, and per-sonal characteristics do not exercise anystatistically significant infiuence. Our hypoth-eses 2 and 3 are supported: The extra supportfrom the proponents of nuclear energy andfrom those who regard the site selection ruleas acceptable is lost once compensationis in-troduced. Assuming that these two variablesrepresent proxies for the level of public spirit,the results are consistent with the predictionsof our Crowding Theory.

IV. Conclusions

Our theoretical and empirical knowledgehas progressed significantly since Titmuss’sintuitive contention that monetary compensa-tion destroys altruistic values. We can nowdraw on a well-established Crowding Theorymoving far beyond the example of blood do-nations. This theory is consistent with rationalchoice and can therefore be integrated intoeconomics. The crowding-out effect explainswhy the support for a noxious facility de-creased when monetary compensation to hostit was offered.

Important conclusions follow. First, wherepublic spirit prevails, using price incentives tomuster support for the construction of a so-cially desirable, but locally unwanted, facilitycomesat a higherprice than suggested by stan-dard economic theory because these incentivestend to crowd out civic duty. Second, the useof price incentives needs to be reconsidered inall areas where intrinsic motivation can em-pirically be shown to be important. We spec-ulate that this may be the case in workrelationships characterized by incomplete

754 THE AMERICAN ECONOMIC REVIEW

contracts as well as in environmental policy.Third, in policy areas where intrinsic motiva-tion does not exist or has already beencrowdedout, the relative price effect, and thusthe use of compensation, are promisingstrat-egies to win local support.

These conclusions are of general relevancefor economic theory and policy because theyidentify a particular limit of monetary com-pensationto rally support for a socially desiredenterprise. The relative price effect of mone-tary compensation is not questioned in anyway, but this measure becomesless effectivewhen crowding-out is considered.

APPENDIX

Question I: ‘‘Suppose that the National Co-operative for the Storage of Nuclear Waste(NAGRA), after completing exploratory drill-ing, proposes to build the repository forlow- and mid-level radioactive waste in yourhometown.Federal experts examinethis prop-osition, and the federal parliament decides tobuild the repository in your community. In atownhall meeting, do you accept this propo-sition or do youreject this proposition?’’

Question 2: ‘‘Suppose that the National Co-operative for the Storage of Nuclear Waste(NAGRA), after completing the exploratorydrilling, proposes to build the repository forlow- and mid-level radioactive waste in yourhometown. Federal experts examinethis prop-osition, and the federal parliament decides tobuild the repository in your community. More-over, the parliament decides to compensate allresidents of the host community with 5,000francs per year and per person. Your familywill thus receive xxx francs per year. The com-pensation is financed by all taxpayers in Swit-zerland. In a townhall meeting, do: you acceptthis proposition or do you reject this proposi-tion?’’ (The size of compensation wasvariedas described above; total compensation perfamily was automatically computedbythe lap-top computer the interviewer used. The pay-ments were said to be continued during thelifetime of the facility.)

Question 3: ‘There are many reasons why onedoes not support the construction of a reposi-tory in one’s own community even though

SEPTEMBER 1997

compensation is offered. Please indicate if thefollowing reasons were important for your de-cision: (a) I demand a higher compensation.(b) If so much moneyis offered, the repositorymust be very dangerous.’’ (Question wasonly given to those who hadrejected thecompensation.)

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