In the early 1990s, Switzerland was getting ready to have a national referendum about where it would site nuclear waste dumps. Citizens had strong views on the issue and were well informed. Bruno Frey and Felix Oberholzer-Gee, two social scientists, went door-to-door, asking people whether they would be willing to have a waste dump in their community. An astonishing 50% of respondents said yes — this despite the fact that people generally thought such a dump was potentially dangerous and would lower the value of their property. The dumps had to go somewhere, and like it or not, people had obligations as citizens.

Frey and Oberholzer-Gee then asked a slightly different question. People were asked whether, if they were given an annual payment equivalent to 6-weeks worth of an average Swiss salary, they would be willing to have the dumps in their communities. So these people, who already had one reason to say yes — their obligations as citizens — were now given a second reason — financial incentives. Yet in response to this question, only 25% of respondents agreed. Adding the financial incentive cut acceptance in half.

Thus, the Swiss who were given two reasons to accept a nuclear waste site were less likely to say yes than those only given one. Frey and Oberholzer-Gee explained this result by arguing that reasons don’t always add; sometimes, they compete. The Swiss who were not offered incentives had to decide whether their responsibilities as citizens outweighed their distaste for having nuclear wastes dumped in their backyards. Some thought yes, and others, no. But that was the only question they had to answer.

The situation was more complex when citizens were offered cash incentives. Now they had to answer another question before they even got to the issue of accepting the nuclear wastes. “Should I approach this dilemma as a Swiss citizen or as a self-interested individual? Citizens have responsibilities, but they’re offering me money. Maybe the cash is an implicit instruction to me to answer the question based on the calculation of self interest.” Taking the lead of the questioners, citizens framed the waste-siting issue as just about self-interest. With their self-interested hats squarely on their heads, citizens concluded that six-weeks pay wasn’t enough. Indeed, they concluded that no amount of money was enough. The offer of money undermined the moral force of people’s obligations as citizens. Morality is for suckers, the offer of money seemed to be saying, even if only implicitly.

Something similar occurred in an Israeli day care center that was faced with the problem that more and more parents were coming late — after closing — to pick up their kids. Since the day care center couldn’t very well lock up and leave toddlers sitting alone on the steps awaiting their errant parents, they were stuck. Exhortation to come on time did not have the desired effect, so the day care center resorted to a fine for lateness. Now, parents would have two reasons to come on time. It was their obligation, and they would pay a fine for failing to meet that obligation.

But the day care center was in for a surprise. When they imposed a fine for lateness, lateness increased. Prior to the imposition of a fine, about 25% of parents came late. When the fine was introduced, the percentage of latecomers rose, to about 33%. As the fines continued, the percentage of latecomers continued to go up, reaching about 40% by the 16th week.

Why did the fines have this paradoxical effect? To many of the parents, it seemed that a fine was just a price. We know that a fine is not a price. A price is what you pay for a service or a good. It’s an exchange between willing participants. A fine, in contrast, is punishment for a transgression. A $25 parking ticket is not the price for parking; it’s the penalty for parking where parking is not permitted. But there is nothing to stop people from interpreting a fine as a price. If it costs you $30 to park in a downtown garage, you might well calculate that it’s cheaper to park illegally on the street. Any notion of moral sanction is lost. You’re not doing the “wrong” thing; you’re doing the economical thing. And to get you to stop, we’ll have to make the fine (price) for parking illegally higher than the price for parking in a garage.

That’s exactly what happened in the day care centers. Prior to the imposition of fines, parents knew it was wrong to come late. Obviously, many of the parents did not regard this transgression as serious enough to get them to stop committing it, but there was no question that what they were doing was wrong. But when fines were introduced, the moral dimension of their behavior disappeared. It was now a straightforward financial calculation. “They’re giving me permission to be late. Is it worth $25? Is that a good price to pay to let me stay in the office a few minutes longer? Sure is!” The fine allowed parents to reframe their behavior as an exchange of a fee (the “fine”) for a “service” (extra childcare). The fines demoralized what had previously been a moral act. And this is what incentives can do in general. They can change the question in people’s minds from “Is this right or wrong?” to “Is this worth the price?”

Once lost, this moral dimension is hard to recover. When, near the end of the study, the fines for lateness were discontinued, lateness became even more prevalent. By the end of the study, the incidence of lateness had almost doubled. It’s as though the introduction of fines permanently altered parents’ framing of the situation from a moral transaction to an economic one. When the fines were lifted, lateness simply became a better deal.

There is certainly nothing dumb about imposing a fine for lateness or an incentive for willingness to house a waste dump. Punishments and rewards. Carrots and sticks. What else is there? Any one of us might have reached for exactly these tools. But it is only a small step from the Israeli day care center to teachers who teach to the test (or cheat by changing student answers), doctors who treat with their eyes firmly fixed on the bottom line, brokers who tout junk investments to clients, and rating agencies who turn a blind eye to the investment instruments being offered by the companies that are paying them.

Thinking of “smart” incentives as magic bullets is virtually guaranteed to demoralize activities, and practitioners, and eventually, whole practices. Incentives are meant to be a substitute for having people who do the right thing because it’s the right thing. They aren’t.

This post was written with my colleague, Kenneth Sharpe.