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smoking campaign of recent years. The addition of a $3-per-pack “sin tax” is a

strong economic incentive against buying cigarettes. The banning of cigarettes in

restaurants and bars is a powerful social incentive. And when the U.S.

government asserts that 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 been put in place to

deter crime. Considering this fact, it might be worthwhile to take a familiar

question—why is there so much crime in modern society?—and stand it on its

head: why isn’t there a lot more crime?

After all, every one of us regularly passes up opportunities to maim, steal, and

defraud. The chance of going to jail—thereby losing your job, your house, and

your freedom, all of which are essentially economic penalties—is certainly a

strong incentive. But when it comes to crime, people also respond to moral

incentives (they don’t want to do something they consider wrong) and social

incentives (they don’t want to be seen by others as doing something wrong). For

certain types of misbehavior, social incentives are terribly powerful. In an echo of

Hester Prynne’s scarlet letter, many American cities now fight prostitution with a

“shaming” offensive, posting pictures of convicted johns (and prostitutes) on

websites or on local-access television. Which is a more horrifying deterrent: a

$500 fine for soliciting a prostitute or the thought of your friends and family

ogling you on www.HookersAndJohns.com.

So through a complicated, haphazard, and constantly readjusted web of

economic, social, and moral incentives, modern society does its best to militate

against crime. Some people would argue that we don’t do a very good job. But

taking the long view, that is clearly not true. Consider the historical trend in

homicide (not including wars), which is both the most reliably measured crime

and the best barometer of a society’s overall crime rate. These statistics, compiled

by the criminologist Manuel Eisner, track the historical homicide levels in five

European regions.

HOMICIDES

(per 100,000 People)

ENGLAND

NETHERLANDS

AND BELGIUM

SCANDINAVIA

GERMANY AND

SWITZERLAND

ITALY

13th

and

14th

c.

23.0

47.0

n.a.

37.0

56.0

15th

c.

n.a.

45.0

46.0

16.0

73.0

16th

c.

7.0

25.0

21.0

11.0

47.0

17th

c.

5.0

7.5

18.0

7.0

32.0

18th

c.

1.5

5.5

1.9

7.5

10.5

19th

c.

1.7

1.6

1.1

2.8

12.6

1900–

1949

0.8

1.5

0.7

1.7

3.2

1950–

1994

0.9

0.9

0.9

1.0

1.5

The steep decline of these numbers over the centuries suggests that, for one of

the gravest human concerns—getting murdered—the incentives that we

collectively cook up are working better and better.

So what was wrong with the incentive at the Israeli day-care centers?

You have probably already guessed that the $3 fine was simply too small. For

that price, a parent with one child could afford to be late every day and only pay

an extra $60 each month—just one-sixth of the base fee. As babysitting goes,

that’s pretty cheap. What if the fine had been set at $100 instead of $3? That

would have likely put an end to the late pickups, though it would have also

engendered plenty of ill will. (Any incentive is inherently a trade-off; the trick is

to balance the extremes.)

But there was another problem with the day-care center fine. It substituted an

economic incentive (the $3 penalty) for a moral incentive (the guilt that parents

were supposed to feel when they came late). For just a few dollars each day,

parents could buy off their guilt. Furthermore, the small size of the fine sent a

signal to the parents that late pickups weren’t such a big problem. If the day-care

center suffers only $3 worth of pain for each late pickup, why bother to cut short

the tennis game? Indeed, when the economists eliminated the $3 fine in the

seventeenth week of their study, the number of late-arriving parents didn’t

change. Now they could arrive late, pay no fine, and feel no guilt.

Such is the strange and powerful nature of incentives. A slight tweak can

produce drastic and often unforeseen results. Thomas Jefferson noted this while

reflecting on the tiny incentive that led to the Boston Tea Party and, in turn, the

American Revolution: “So inscrutable is the arrangement of causes and

consequences in this world that a two-penny duty on tea, unjustly imposed in a

sequestered part of it, changes the condition of all its inhabitants.”

In the 1970s, researchers conducted a study that, like the Israeli day-care study,

pitted a moral incentive against an economic incentive. In this case, they wanted

to learn about the motivation behind blood donations. Their discovery: when

people are given a small stipend for donating blood rather than simply being

praised for their altruism, they tend to donate less blood. The stipend turned a

noble act of charity into a painful way to make a few dollars, and it wasn’t worth

it.

What if the blood donors had been offered an incentive of $50, or $500, or $5,000?

Surely the number of donors would have changed dramatically.

But something else would have changed dramatically as well, for every incentive

has its dark side. If a pint of blood were suddenly worth $5,000, you can be sure

that plenty of people would take note. They might literally steal blood at

knifepoint. They might pass off pig blood as their own. They might circumvent

donation limits by using fake IDs. Whatever the incentive, whatever the

situation, dishonest people will try to gain an advantage by whatever means

necessary.

Or, as W. C. Fields once said: a thing worth having is a thing worth cheating for.

Who cheats?

Well, just about anyone, if the stakes are right. You might say to yourself, I don’t

cheat, regardless of the stakes. And then you might remember the time you

cheated on, say, a board game. Last week. Or the golf ball you nudged out of its

bad lie. Or the time you really wanted a bagel in the office break room but

couldn’t come up with the dollar you were supposed to drop in the coffee can.

And then took the bagel anyway. And told yourself you’d pay double the next

time. And didn’t.

For every clever person who goes to the trouble of creating an incentive scheme,

there is an army of people, clever and otherwise, who will inevitably spend even

more time trying to beat it. Cheating may or may not be human nature, but it is

certainly a prominent feature in just about every human endeavor. Cheating is a

primordial economic act: getting more for less. So it isn’t just the boldface

names—inside-trading CEOs and pill-popping ballplayers and perk-abusing

politicians—who cheat. It is the waitress who pockets her tips instead of pooling

them. It is the Wal-Mart payroll manager who goes into the computer and shaves

his employees’ hours to make his own performance look better. It is the third

grader who, worried about not making it to the fourth grade, copies test answers

from the kid sitting next to him.

Some cheating leaves barely a shadow of evidence. In other cases, the evidence is

massive. Consider what happened one spring evening at midnight in 1987: seven

million American children suddenly disappeared. The worst kidnapping wave in

history? Hardly. It was the night of April 15, and the Internal Revenue Service

had just changed a rule. Instead of merely listing each dependent child, tax filers

were now required to provide a Social Security number for each child. Suddenly,

seven million children—children who had existed only as phantom exemptions

on the previous year’s 1040 forms—vanished, representing about one in ten of all

dependent children in the United States.

The incentive for those cheating taxpayers was quite clear. The same for the

waitress, the payroll manager, and the third grader. But what about that third

grader’s teacher? Might she have an incentive to cheat? And if so, how would

she do it?

Imagine now that instead of running a day-care center in Haifa, you are running

the Chicago Public Schools, a system that educates 400,000 students each year.

The most volatile current debate among American school administrators,

teachers, parents, and students concerns “high-stakes” testing. The stakes are

considered high because instead of simply testing students to measure their

progress, schools are increasingly held accountable for the results.

The federal government mandated high-stakes testing as part of the No Child

Left Behind law, signed by President Bush in 2002. But even before that law,

most states gave annual standardized tests to students in elementary and

secondary school. Twenty states rewarded individual schools for good test scores

or dramatic improvement; thirty-two states sanctioned the schools that didn’t do

well.

The Chicago Public School system embraced high-stakes testing in 1996. Under

the new policy, a school with low reading scores would be placed on probation

and face the threat of being shut down, its staff to be dismissed or reassigned.

The CPS also did away with what is known as social promotion. In the past, only

a dramatically inept or difficult student was held back a grade. Now, in order to

be promoted, every student in third, sixth, and eighth grade had to manage a

minimum score on the standardized, multiple-choice exam known as the Iowa

Test of Basic Skills.

Advocates of high-stakes testing argue that it raises the standards of learning and

gives students more incentive to study. Also, if the test prevents poor students

from advancing without merit, they won’t clog up the higher grades and slow

down good students. Opponents, meanwhile, worry that certain students will be

unfairly penalized if they don’t happen to test well, and that teachers may

concentrate on the test topics at the exclusion of more important lessons.

Schoolchildren, of course, have had incentive to cheat for as long as there have

been tests. But high-stakes testing has so radically changed the incentives for

teachers that they too now have added reason to cheat. With high-stakes testing,

a teacher whose students test poorly can be censured or passed over for a raise or

promotion. If the entire school does poorly, federal funding can be withheld; if

the school is put on probation, the teacher stands to be fired. High-stakes testing

also presents teachers with some positive incentives. If her students do well

enough, she might find herself praised, promoted, and even richer: the state of

California at one point introduced bonuses of $25,000 for teachers who produced

big test-score gains.

And if a teacher were to survey this newly incentivized landscape and consider

somehow inflating her students’ scores, she just might be persuaded by one final

incentive: teacher cheating is rarely looked for, hardly ever detected, and just

about never punished.

How might a teacher go about cheating? There are any number of possibilities,

from the brazen to the sophisticated. A fifth-grade student in Oakland recently

came home from school and gaily told her mother that her super-nice teacher

had written the answers to the state exam right there on the chalkboard. Such

instances are certainly rare, for placing your fate in the hands of thirty

prepubescent witnesses doesn’t seem like a risk that even the worst teacher

would take. (The Oakland teacher was duly fired.) There are more subtle ways to

inflate students’ scores. A teacher can simply give students extra time to

complete the test. If she obtains a copy of the exam early—that is, illegitimately—

she can prepare them for specific questions. More broadly, she can “teach to the

test,” basing her lesson plans on questions from past years’ exams, which isn’t

considered cheating but certainly violates the spirit of the test. Since these tests

all have multiple-choice answers, with no penalty for wrong guesses, a teacher

might instruct her students to randomly fill in every blank as the clock is

winding down, perhaps inserting a long string of Bs or an alternating pattern of

Bs and Cs. She might even fill in the blanks for them after they’ve left the room.

But if a teacher really wanted to cheat—and make it worth her while—she might

collect her students’ answer sheets and, in the hour or so before turning them in

to be read by an electronic scanner, erase the wrong answers and fill in correct

ones. (And you always thought that no. 2 pencil was for the children to change

their answers.) If this kind of teacher cheating is truly going on, how might it be

detected?

To catch a cheater, it helps to think like one. If you were willing to erase your

students’ wrong answers and fill in correct ones, you probably wouldn’t want to

change too many wrong answers. That would clearly be a tip-off. You probably

wouldn’t even want to change answers on every student’s test—another tip-off.

Nor, in all likelihood, would you have enough time, because the answer sheets

are turned in soon after the test is over. So what you might do is select a string of

eight or ten consecutive questions and fill in the correct answers for, say, one-half

or two-thirds of your students. You could easily memorize a short pattern of

correct answers, and it would be a lot faster to erase and change that pattern than

to go through each student’s answer sheet individually. You might even think to

focus your activity toward the end of the test, where the questions tend to be

harder than the earlier questions. In that way, you’d be most likely to substitute

correct answers for wrong ones.

If economics is a science primarily concerned with incentives, it is also—

fortunately—a science with statistical tools to measure how people respond to