money dollar sign

A Fine That Backfired

by Elaine Schwartz    •    May 5, 2012    •    883 Views

Sometimes, deterrents won’t work.

Our story begins at several Israeli day-care centers. Because some parents were picking up their children after dismissal time, two economists suggested a fine. To their surprise, the number of latecomers more than doubled after it was announced. And even when the fine was eliminated, more parents were late.

Discussing the results, one of the economists shared a personal experience. Feeling uneasy about a late pick-up for his young child, he “drove like crazy” to the day-care center whenever he ran late. However, after they imposed a $3 charge for any delay, he said to himself, “It’s not worth risking your life for $3.”

You can see what happened. The cost changed. Initially, the dollar cost was zero but the moral or social cost was high. The $3 charge, though, “crowded out” the intangible cost and made a late pick-up “cheaper.”

Our Bottom Line: Newly articulated penalties can have unintended consequences. I wonder whether Dodd-Frank will surprise us.

To read more about the day-care experiment, you might enjoy this paper by economists Uri Gneezy and Aldo Rustichini, this article, and sections of Predictably Irrational and Freakonomics. A recent econlife post also looked at when dollars crowd out community values.

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