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Working paper

Discouragement through incentives

Working Paper 12-2018. Working Paper 12-2018 . University of Glasgow, 2018
Dmitri V. Vinogradov, Elena V. Shadrina.
Incentives are usually designed to promote desirable behaviour. In many instances, however, even in the absence of an incentive scheme, people may deliberately choose to act as desired. In such a case, introducing a system of incentives may discourage people from doing this. The discouragement mechanism works through the pos- sibility of errors that may wrongly classify the observed behaviour as undesirable, and hence trigger penalties. The effect is amplified by pessimism, which leads to an overestimation of the error probability, and by the disappointment from errors, which increases the disutility of unfair penalties. This approach is capable of ex- plaining two typical observations for enterprises/industries subject to environmental regulation – overcompliance (excessive investment in compliance) and discretionary inspections by regulators (raised frequency of inspections to enterprises suspected of non-compliance).