The Ethics of Incentives

Picture this: It’s a snowy December night and your flight into Syracuse just arrived over an hour late. The last shuttle to Ithaca has left and the next one won’t be along until morning. Spending the night in Syracuse is not an option due to an early morning meeting. Rather than shell out $140 for a cab ride, you call your friend Karen to ask if she can pick you up. She agrees and you offer to return the favor by taking her to dinner later in the week. You figure a dinner plus a few dollars for gas should make the trip worth her while and still cost you less than a $140 cab fare.

It’s late when Karen finally makes it to the airport. She’s groggy. To stay alert on the ride back, she cranks up a mix tape of 80s hits. The two of you rock out until the blare of a police siren jolts you back to reality. Cruising down the hill a quarter of a mile back, Karen had unwittingly exceeded the speed limit by 15 mph and is now being issued a ticket for $200. You feel terrible. After all, Karen came all this way for you; she shouldn’t pay $200 on top of it. Then again, it wasn’t your lead foot that aroused the attention of the state trooper. What to do? Should you help pay for Karen’s speeding ticket or not?

Like an episode of Dragnet, the story I have just described in true; the names have been changed to protect the innocent. The innocent are actually two friends of mine and I don’t want either of them mad at me. But the situation does bring to light an interesting dilemma; one I feel especially qualified to address. I should also mention that the involved parties did resolve the issue amicably and without dispute. So this essay is not a critique of their behavior, but merely a theoretical exercise to demonstrate what I would have done had I been in the shoes of Pamela, the passenger.

To determine who should pay the ticket, the criteria you want to account for are compensation and incentives. Karen is your friend first and foremost. And although she picked you up out of the kindness of her heart, failing to adequately compensate her could lead to ill-will. At the same time, compensating her for her speeding ticket rewards bad behavior. But was it bad behavior that led to her speeding? It was after all late--past her normal bedtime--and she likely lost focus on the speedometer due to fatigue and the distraction of the music. In her situation, you may have done the same.

The thing to recognize is, there is a proper level of care in driving such that even a driver exercising proper care may still get pulled over with some small probability. The proper level of care balances the desire to minimize the probability of getting pulled over against the desire to get home as fast as possible. If we think of care simply in terms of speed (or lack thereof), driving too slow satisfies the former desire at the expense of the latter, while driving too fast satisfies the latter at the expense of the former. The point being, you have no way of knowing whether or not Karen was exercising proper care simply by the fact that she was pulled over. All you can hope to do is provide the incentive for her to take proper care and leave the driving to her.

The compensation criteria is straightforward enough but it becomes tricky when coupled with incentives. To see this, suppose you decide to split the cost of the ticket and pay her $100. Actually, with the ticket already issued it’s too late to affect Karen’s incentives. Instead, suppose you made a deal with her ahead of time telling her that you will pay half of all tickets incurred on the trip. Under this deal, Karen is compensated for half of the penal expense of the trip. However, since she internalizes only half the cost, Karen’s incentive to exercise proper care is reduced. In this way, a tension exists between compensation and incentives. The greater is the share of the ticket you pay, the weaker is Karen’s incentive to drive the speed you would have her choose and the greater is the likelihood that you will pay out.

It should be clear that any agreement in which you give Karen more when she gets a ticket than when she doesn’t creates a perverse incentive for her to drive too fast. The solution then is to offer a fixed payment (which could involve non-pecuniary forms of compensation) independent of whether or not she gets a ticket. This way, if Karen gets a ticket and can’t expect another dime from you, she bears the full brunt of her actions. When this happens, she will take what she deems to be the proper level of care in driving.

With incentives accounted for, the payment must be large enough to compensate Karen for her time and for gas, but also for the probability and subsequent penalty of being ticketed while exercising proper care. If a dinner out and a few dollars in gas are enough cover these costs, you can feel content knowing you have done your part. If not, think about substituting something more valued like opera tickets in place of the dinner. But if the cost of fully compensating Karen exceeds $140, I would advise you to take the cab.

Lest you think this incentive-based approach too calculating to be used with those we care for, think about parenting. Parenting is rife with tradeoffs between indulging your child’s wishes and teaching them to be a good person. In “Life’s Little Instruction Book,” (Rutledge Hill Press, 1991) instruction number 88 reads, “Even if you’re financially well-to-do, have your children pay for all their automobile insurance.” Why should a child pay for her own auto insurance? Paying for auto insurance forces the child to internalize the cost of reckless driving, thus providing an additional incentive to drive carefully. The well-to-do parents are then better served to spend their money on a good car, loaded to the gills in safety features.