The cost of being late: do incentives always work?

Economics provides us with a really big insight into how the world works. People respond to changes in incentives. A great deal of public policy is based on this principle. You want fewer people to drive into Central London? Introduce a congestion charge and make it more expensive. It works.

In practice, of course, estimating exactly how much any given change in a particular incentive alters behaviour can be a difficult problem. Indeed, changing incentives can sometimes have unforeseen consequences, which may appear perverse.

A couple of months ago, a school in Milton Keynes proposed to fine parents £60 if their child was late more than 10 times in a term. We do not know yet how this has worked out. But a similar scheme in a day care centre in Israel seemed to backfire. After the fine had been introduced, there was a rise, not a fall, in the number of parents delivering their children late. People now knew the price – the fine – for being late. They could then make judgements as to the value of the effort required to arrive on time compared to the cost of being late. Previously, they had only incurred the displeasure of the teacher. A recent book by the Harvard political philosopher Michael Sandel cites this as an example of the intrinsic limits to the use of markets. Social norms, not incentives, matter. His book has metropolitan liberals both here and in America gurgling with pleasure.

But the problem essentially arose not because of the limitations of markets, but because there were too few markets. Without a market, the disapproval could not be priced transparently. Parents just had to guess what this was worth, and they clearly placed on average a higher price on it than the level of the fine set by the school. The school was also at fault for not increasing the fine by trial and error steps until it started to do its intended job.

More challenging is the study carried out by the Frameworks Institute in America on public attitudes towards global warming. The document, ‘How to Talk About Global Warming’, reported that substantial numbers of people, when faced with how they respond to more extreme weather, choose to buy an SUV to help them cope, rather than to support increases in fuel-efficiency standards.

The instinctive response of a regulator to this finding would be to say that these individuals only had access to incomplete information. With more and better information, they would then respond to incentives so that they made the ‘correct’ choice. But more information does not necessarily help. Al Gore’s 2006 film about global warming, ‘An Inconvenient Truth’, received enormous publicity. But the number of Americans telling Gallup that the media was exaggerating global warming has grown from 34 per cent then to 42 percent today.

A popular policy for avoiding a financial crisis is to restrict bankers’ bonuses, giving them different incentives. It may work. But understanding exactly how incentives operate in practice does not always have a pat solution.

Paul Ormerod
As published in City AM on Wednesday 16th April

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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.