**Psychological Foundations of Incentives** by Ernst Fehr and Armin Falk explores how non-pecuniary motives like reciprocity and social approval influence economic incentives. The paper argues that traditional economic models, which focus on self-interest and material rewards, overlook important psychological factors that shape human behavior. These factors include the desire to reciprocate, the desire to avoid social disapproval, and the desire to work on interesting tasks. The authors show that these motives can significantly affect the effectiveness of economic incentives, sometimes even counteracting them. The paper discusses how reciprocity can weaken or strengthen economic incentives depending on the context. For example, if an employer treats workers kindly, workers are more likely to reciprocate by providing higher effort levels. However, if an employer is perceived as hostile, workers may reduce their effort. The authors also show that monetary incentives may backfire if they are perceived as unfair or if they create a hostile environment. The paper also examines the role of social approval and social norms in shaping behavior. It argues that social approval can be a powerful incentive in itself, and that economic incentives may fail to influence behavior if they conflict with social norms. The authors provide experimental evidence showing that workers are more likely to cooperate voluntarily when they expect to be rewarded, and that this cooperation can be significantly reduced if they perceive the incentive as hostile. The paper also discusses the interaction between extrinsic incentives and task-specific intrinsic motivation. It argues that while the literature on this topic is intriguing, its economic relevance has yet to be fully demonstrated. The authors suggest that further research is needed to clarify the relationship between these factors. Overall, the paper highlights the importance of considering psychological factors in the design of economic incentives. It argues that traditional economic models are incomplete and that a more comprehensive understanding of human motivation is necessary for effective incentive design. The authors conclude that economic incentives should be designed with a better psychological foundation, taking into account the complex interplay between self-interest, social preferences, and social norms.**Psychological Foundations of Incentives** by Ernst Fehr and Armin Falk explores how non-pecuniary motives like reciprocity and social approval influence economic incentives. The paper argues that traditional economic models, which focus on self-interest and material rewards, overlook important psychological factors that shape human behavior. These factors include the desire to reciprocate, the desire to avoid social disapproval, and the desire to work on interesting tasks. The authors show that these motives can significantly affect the effectiveness of economic incentives, sometimes even counteracting them. The paper discusses how reciprocity can weaken or strengthen economic incentives depending on the context. For example, if an employer treats workers kindly, workers are more likely to reciprocate by providing higher effort levels. However, if an employer is perceived as hostile, workers may reduce their effort. The authors also show that monetary incentives may backfire if they are perceived as unfair or if they create a hostile environment. The paper also examines the role of social approval and social norms in shaping behavior. It argues that social approval can be a powerful incentive in itself, and that economic incentives may fail to influence behavior if they conflict with social norms. The authors provide experimental evidence showing that workers are more likely to cooperate voluntarily when they expect to be rewarded, and that this cooperation can be significantly reduced if they perceive the incentive as hostile. The paper also discusses the interaction between extrinsic incentives and task-specific intrinsic motivation. It argues that while the literature on this topic is intriguing, its economic relevance has yet to be fully demonstrated. The authors suggest that further research is needed to clarify the relationship between these factors. Overall, the paper highlights the importance of considering psychological factors in the design of economic incentives. It argues that traditional economic models are incomplete and that a more comprehensive understanding of human motivation is necessary for effective incentive design. The authors conclude that economic incentives should be designed with a better psychological foundation, taking into account the complex interplay between self-interest, social preferences, and social norms.