SOCIAL AND FINANCIAL INCENTIVES BY DR. S. MALINI

Social and financial incentives are key motivators influencing human behavior, decisions, and performance. Financial incentives—such as bonuses, commissions, discounts, and tax benefits—offer tangible rewards that drive productivity and participation in organizations and public programs. They appeal to the rational, profit-maximizing side of individuals, forming the foundation of traditional economic theory.

Social incentives, on the other hand, rely on non-monetary rewards like recognition, social status, peer approval, and belonging. These incentives trigger emotional and psychological responses that encourage positive behaviors such as cooperation, community participation, and healthy living, often at lower cost than financial rewards.

Behavioral economics highlights that financial and social incentives can interact in complex ways. Sometimes, introducing money-based rewards for activities people already enjoy can reduce intrinsic motivation—a phenomenon called “crowding out.” Poorly designed incentives may lead to reduced performance, lower creativity, or undermine moral values (e.g., paying for voluntary acts like blood donation).

When well-designed, hybrid incentives—combining financial and social rewards—can reinforce each other. For example, offering both cash bonuses and public recognition enhances motivation and engagement. Complementary framing, which connects practical and emotional benefits (e.g., “Get fit and feel confident”), increases effectiveness.

In public policy, social and financial incentives play a vital role in guiding behavior. Between laissez-faire (no intervention) and strict regulation lies a middle path of “nudge policies,” which subtly shape choices without restricting freedom. India’s policies such as Swachh Bharat Abhiyan, Beti Bachao Beti Padhao, Digital India, and the LPG Subsidy Surrender Campaign successfully use social recognition, moral appeals, and financial benefits to drive social change.

Together, these insights show that a balance between financial gain and social motivation leads to sustainable and meaningful behavior change in both economic and public domains.

1. SOCIAL & FINANCIAL
INCENTIVES
Dr. S. Malini
Associate Professor
PG & Research Department of Economics
Ethiraj College for Women

2. Introduction
Socialincentivesarenon-monetaryrewardsormotivationsthat
influencehumandecisionsbasedonsocialfactors.
Financialincentivesareaprimarymotivatorforaction,particularlyin
economicandcommercialcontexts.Theyarecentraltotraditional
economictheory,whichpositsthatindividuals,or"economicmen,"
acttomaximisetheirownmonetarypayoffs.
Socialandfinancialincentivesarekeydriversofhumanbehaviour,
influencingdecisionsineconomicexperiments,contentcreation,and
dailylife.
Theseincentivescanoperateindependentlyorinconjunction,
sometimesleadingtooutcomesthattraditionaleconomicmodels,
focusedsolelyonfinancialgain,cannotpredict

3. Financial Incentives
Rewardsorbenefitsgivenintheformofmoneyormonetaryvaluetoencouragespecificbehaviours,
actions,orperformance.
Crucialroleinmotivatingindividuals,employees,andconsumersbyofferingtangibleeconomicgains.
Examplesincludebonuses,salaryhikes,discounts,cashprizes,commissions,andtaxbenefits.
Organisationsandgovernmentsoftenusefinancialincentivestodriveproductivity,improveparticipation,
andachievetargetedoutcomesefficiently.

4. Mechanisms and Examples
Cash bonus, prize-
linked savings and
conditional cash
transfers.
Eg: Sales targets and
sales tracking uptake
Fear of losing
motivates more than
equivalent gain.
Eg: lose deposit if fail
to quit smoking vs gain
bonus if quit
Communication alters
effectiveness.
Lotteries capitalize on
overestimating
probabilities.
Cost-effective vs fixed
small payments..

5. •Social incentives are powerful motivators that influence human behaviour through social interactions,
recognition, and the desire to belong.
•Unlike financial incentives, which rely on monetary rewards, social incentives tap into people’s need for
approval, status, reputation, and connection.
•Examples include public recognition, praise, social status, peer comparisons, or community appreciation.
•By leveraging these social dynamics, organisations, governments, and platforms can encourage positive
behaviours—such as increased participation, better performance, or healthier lifestyle choices—often at a
lower cost than direct financial rewards.
Social Incentives

6. Key social incentives in Behavioural Economics
Social Norms Social Recognition and Status
Peer Effects and Competition Reciprocity and Altruism

7. Social IncentivesVs Financial Incentives
Behaviouraleconomicsoffersinsightsintowhenandwhysocialincentivescanbemoreeffectivethan,orcaninteractin
complexwayswith,traditionalfinancialincentives.
"Crowding out" intrinsic motivation
Offering financial rewards for tasks that people already find meaningful or are intrinsically motivated to do can have a
negative, or "crowding out," effect.
By introducing an external, monetary reward, the activity may start to feel like work, reducing the enjoyment and
intrinsic motivation associated with it. A well-documented phenomenon is that introducing financial incentives for a task
people are already intrinsically motivated to do can decrease their intrinsic motivation.

8. Impactof Poorly Designed Incentives
REDUCED
PERFORMANCE
UNDERMINING
MORALS
QUANTITY OVER
QUALITY
Offering monetary rewards for
inherently interesting tasks has
been shown to reduce
performance
If incentives are poorly
communicated, they can undermine
moral intentions. For instance,
paying people for prosocial
behaviour like blood donation can
damage social trust.
Incentives are based on a
measurable outcome like
volume of output, it may
sacrifice quality or creativity

9. When they can reinforce each other
HybridIncentives
Acompanyoffersemployeesacashbonus(financial)alongwithpublicrecognitionatanawardceremony(social)
forachievingtopsales.Thismixofmonetaryrewardandsocialacknowledgementboostsbothmotivationand
engagement.
ComplementaryFraming
Agymadvertises,“Getfitandfeelconfident!”insteadofjust“Loseweight,”highlightingboththepositive
outcomeandtheaddedemotionalbenefit.Thiscomplementaryframingcombinestwoappealingmessagesto
strengthentheoverallimpact.

10. Applications in policy and business
Understanding the power of social incentives has widespread applications for
influencing behaviour
Public Policy
Environmental Sustainability
Public Health
Employee Motivation
Collaboration
Gamification and Commitment Devices

11. The role of Behavioural Economics in Public
Policy
Publicpoliciescanbegradedonaspectrumcapturinghowstronglytheyinfluence(orcoerce)
behaviour.Ononeextremeislaissez-faire,i.e.doingnothingandleavingindividuals/firmstocharttheir
owncourse.Laissez-faireworkswellwhenmarketsachievesociallydesirableoutcomesontheirown.
Wheremarketsfail,laissez-fairefails.Forinstance,individuals/firmsinafreemarketwouldnotrestrain
pollution.
Publicpolicy,intheformofregulation,mandatespeopletoactinasociallydesirablemanner.
Sandwichedbetweentheseextremesarepoliciesthatincentivizegoodbehaviourordis-incentivizebad
behaviour,suchassubsidiesforrenewableenergyandtaxesontobacco.
Recently,behaviouraleconomistshavediscoveredtheefficacyofanewclassof“nudge”policiesthatlie
betweenlaissez-faireandincentives.
Suchpoliciesleverageinsightsfromhumanpsychologytoinfluencethechoicearchitectureofpeople.
Nudgepoliciesgentlysteerpeopletowardsdesirablebehaviourevenwhilepreservingtheirlibertyto
choose.

12. IndianPublicPolicymarksatransformativeshiftingovernance—fromcommand-and-controlapproachestomore
citizen-centric,choice-sensitivemodels.
PoliciessuchasSwachhBharatAbhiyan,BetiBachaoBetiPadhao,andJanDhanYojanademonstratehowsimple
behaviouralnudges,groundedinculturalunderstandingandpsychologicalinsight,cancreatealastingsocietal
impact.India,withitsvastdiversity,presentsadynamictestinggroundforbehaviouralinterventions.
LPG Subsidy Surrender Campaign
Beti Bachao, Beti Padhao (BBBP)
Digital India & UPI Push Eco-Mark Scheme

13. Objectives of the Schemes
Name of the SchemeLiteral Meaning of the Name Objective of the Scheme (Cultural/Societal aspect
used)
Namami Gange Namami Gange means 'I pray to Ganga'
as the river Ganga is revered in our
culture.
To arrest the pollution of Ganga River and revive
the river.
POSHAN Abhiyan Poshan means holistic nutritionMulti-ministerial convergence mission to ensure a
malnutrition-free India by 2022.
Ujjwala
Means 'bright, clear'
To safeguard the health of women by providing
them with clean cooking fuel – LPG.
PM Mudra YojanaMudra means "currency, coins"
Provides loans up to 10 lakh to the non-corporate,
non-farm small/micro enterprises.
an Dhan Yojana Jan Dhan implies "money of the people"
Financial inclusion program to expand access to
financial services.
Ayushman Bharat
Ayushman means "Being Blessed with
long life"
Universal and affordable access to good quality
health care services.
Source: India Budget 2019-2020, Economic Survey

14. REFERENCES
https://www.ispp.org.in/how-behavioural-economics-can-improve-public-policy-outcomes-real-
world-applications-insights/
https://www.indiabudget.gov.in/budget2019-20/economicsurvey/doc/vol1chapter/echap02_vol1.pdf

15. THANK YOU