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Chapter One

What Do Schoolteachers
and Sumo Wrestlers
Have in Common?

Imagine for a moment that you are the manager of a day-care center.You have a clearly stated policy that children are supposed to bepicked up by 4 p.m. But very often parents are late. The result: at day'send, you have some anxious children and at least one teacher whomust wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma -- it turned out tobe a rather common one -- offered a solution: fine the tardy parents.Why, after all, should the day-care center take care of these kids forfree?

The economists decided to test their solution by conducting astudy of ten day-care centers in Haifa, Israel. The study lasted twentyweeks, but the fine was not introduced immediately. For the firstfour weeks, the economists simply kept track of the number of parentswho came late; there were, on average, eight late pickups perweek per day-care center. In the fifth week, the fine was enacted. Itwas announced that any parent arriving more than ten minutes late would pay $3 per child for each incident. The fee would be added tothe parents' monthly bill, which was roughly $380.

After the fine was enacted, the number of late pickups promptlywent ... up. Before long there were twenty late pickups per week,more than double the original average. The incentive had plainlybackfired.

Economics is, at root, the study of incentives: how people get whatthey want, or need, especially when other people want or need thesame thing. Economists love incentives. They love to dream them upand enact them, study them and tinker with them. The typical economistbelieves the world has not yet invented a problem that he cannotfix if given a free hand to design the proper incentive scheme. Hissolution may not always be pretty -- it may involve coercion or exorbitantpenalties or the violation of civil liberties -- but the originalproblem, rest assured, will be fixed. An incentive is a bullet, a lever, akey: an often tiny object with astonishing power to change a situation.

We all learn to respond to incentives, negative and positive, fromthe outset of life. If you toddle over to the hot stove and touch it, youburn a finger. But if you bring home straight A's from school, you geta new bike. If you are spotted picking your nose in class, you getridiculed. But if you make the basketball team, you move up the socialladder. If you break curfew, you get grounded. But if you ace yourSATs, you get to go to a good college. If you flunk out of law school,you have to go to work at your father's insurance company. But if youperform so well that a rival company comes calling, you become a vicepresident and no longer have to work for your father. If you becomeso excited about your new vice president job that you drive home ateighty mph, you get pulled over by the police and fined $100. But ifyou hit your sales projections and collect a year-end bonus, you notonly aren't worried about the $100 ticket but can also afford to buy that Viking range you've always wanted -- and on which your toddlercan now burn her own finger.

An incentive is simply a means of urging people to do more ofa good thing and less of a bad thing. But most incentives don'tcome about organically. Someone -- an economist or a politician or aparent -- has to invent them. Your three-year-old eats all her vegetablesfor a week? She wins a trip to the toy store. A big steelmakerbelches too much smoke into the air? The company is fined for eachcubic foot of pollutants over the legal limit. Too many Americansaren't paying their share of income tax? It was the economist MiltonFriedman who helped come up with a solution to this one: automatictax withholding from employees' paychecks.

There are three basic flavors of incentive: economic, social, andmoral. Very often a single incentive scheme will include all three varieties.Think about the anti-smoking campaign of recent years. Theaddition of a $3-per-pack "sin tax" is a strong economic incentiveagainst buying cigarettes. The banning of cigarettes in restaurants andbars is a powerful social incentive. And when the U.S. government assertsthat terrorists raise money by selling black-market cigarettes,that acts as a rather jarring moral incentive.

Some of the most compelling incentives yet invented have beenput in place to deter crime. Considering this fact, it might be worthwhileto take a familiar question -- why is there so much crime inmodern society? -- and stand it on its head: why isn't there a lot morecrime?

After all, every one of us regularly passes up opportunities tomaim, steal, and defraud. The chance of going to jail—thereby losingyour job, your house, and your freedom, all of which are essentiallyeconomic penalties -- is certainly a strong incentive. But when itcomes to crime, people also respond to moral incentives (they don'twant to do something they consider wrong) and social incentives (they don't want to be seen by others as doing something wrong). Forcertain types of misbehavior, social incentives are terribly powerful. Inan echo of Hester Prynne's scarlet letter, many American cities nowfight prostitution with a "shaming" offensive, posting pictures of convictedjohns (and prostitutes) on websites or on local-access television.Which is a more horrifying deterrent: a $500 fine for soliciting aprostitute or the thought of your friends and family ogling you onwww.HookersAndJohns.com ...

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Excerpted from Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.