How social preferences provide effort incentives in situations of financial support.

Abstract

When people anticipate financial support, they may reduce preventive effort. We conjecture that the source of financial support can mitigate this moral hazard effect due to social preferences. We compare effort choices when another individual voluntarily provides financial support against effort choices under purely monetary incentives. When financial support is provided voluntarily by another individual, we expect recipients to exert more effort to avoid bad outcomes (level effect) and to reduce effort provision to a lesser degree as financial support becomes more generous (sensitivity effect). We conducted an incentivized laboratory experiment and find some evidence for the level effect and strong evidence for the sensitivity effect. This leads to significant gains in material efficiency with expected wealth being 5.5% higher and 37.3% less volatile.