This paper, authored by Ernst Fehr and Armin Falk, explores the psychological foundations of incentives, challenging the narrow and empirically questionable view of human motivation commonly used in economic theory. The authors argue that neglecting motives such as reciprocity and social approval can lead to a better understanding of the determinants and effects of incentives. They demonstrate that monetary incentives can backfire and reduce performance or compliance with rules, and that these motives can generate powerful incentives themselves. The paper discusses three key human motives: the desire to reciprocate, the desire for social approval, and the desire to work on interesting tasks. It provides experimental evidence that reciprocity can both weaken and strengthen economic incentives, depending on the context. The authors also show that social approval can complicate incentive provision, leading to negative effects on rule compliance even after the initial incentive change is removed. Additionally, they discuss the interaction between extrinsic incentives and task-specific intrinsic motivation, emphasizing the need for further research to clarify these interactions. Overall, the paper aims to provide a more psychologically grounded foundation for understanding incentives, highlighting the importance of non-pecuniary motives in economic behavior.This paper, authored by Ernst Fehr and Armin Falk, explores the psychological foundations of incentives, challenging the narrow and empirically questionable view of human motivation commonly used in economic theory. The authors argue that neglecting motives such as reciprocity and social approval can lead to a better understanding of the determinants and effects of incentives. They demonstrate that monetary incentives can backfire and reduce performance or compliance with rules, and that these motives can generate powerful incentives themselves. The paper discusses three key human motives: the desire to reciprocate, the desire for social approval, and the desire to work on interesting tasks. It provides experimental evidence that reciprocity can both weaken and strengthen economic incentives, depending on the context. The authors also show that social approval can complicate incentive provision, leading to negative effects on rule compliance even after the initial incentive change is removed. Additionally, they discuss the interaction between extrinsic incentives and task-specific intrinsic motivation, emphasizing the need for further research to clarify these interactions. Overall, the paper aims to provide a more psychologically grounded foundation for understanding incentives, highlighting the importance of non-pecuniary motives in economic behavior.