Incentives sound good on the surface, but do they work the way we think they do?

Like anywhere else with economic activity, daycare is a great resource for working Israeli parents. However, a lot of children were getting picked up too late in the evening so the schools decided to try to incentivize earlier pickups by charging a fine when parents came too late. Problem solved, right?

It actually led to more parents coming late!

I don’t think the parents liked to pay the fine, necessarily. The issue was that charging them money changed the nature of their relationship with the teachers. Sure, they were likely paying for daycare already, but not wanting to make the staff wait around indefinitely stems from your sense of empathy – that if they’re working late they’ll silently be bearing that cross for you. When you add the fine, the relationship is reduced to a merely transactional one. Oh, I’m paying? Well, I guess I’ll take my time.

The same can be true for good customer service. When you charge for returns, you may suffer less loss of money in the short-term but you do lose a bond, and possibly repeat business you could have had with a customer.

It’s also true of contracts, which are basically just a right to file a lawsuit. Years ago, Warren Buffett famously made a multi-million dollar deal with Wal-Mart after just a 30-minute meeting – because he trusted them, and to bring in an army of lawyers to oversee the minutiae of the contract would have changed the nature of their relationship. (I should note, however, that he has since dropped their stock)

Fines and contracts are not going away – but we should give a moment’s thought to the totality of what they – and other practices– signal before implementation.