The Israeli childcare experiment

A classic example of perverse incentives, (made famous by Freakonomics):

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 be picked up by 4 P.M. But very often parents are late. The result: at day's end, you have some anxious children and at least one teacher who must wait around for the parents to arrive. What to do?

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

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

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

Since reading it in Freakonomics, I have encountered this example on multiple occasions, almost always being used as an example of the failure of crude economics (e.g. Richard Layard's "Happiness is back" piece in Prospect). The claim is that parents view the "fine" as a fee and no longer feel guilty for being late.

But this merely implies that the fine is too low!

What if the centre raised the fine to $30? Maybe they'd find a price that would cover the cost of paying staff to work overtime and supervise the children? In short, I don't see how an example of a botched incentive system is evidence against using pecuniary incentive systems. And not only this, but the study itself may have been botched. Bryan Caplan reports:

Being a skeptic, I found it difficult to believe that the experiment could have been carried out as described. I know Israel quite well. It is a country where rules are rarely enforced... Therefore, I at least want to know what the procedure was for collecting data.

His detective work revealed that:

There was no attempt to control the accuracy of the RA’s records. Oddly, I was not allowed to talk with the teachers.

There are plenty of good reasons for using non-pecuniary incentive mechanisms, and economists should correct the myth that we associate "incentives" with "cash". But this example isn't one of them.

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