Abstract
Economists often espouse incentives, arguing that expanding choice sets cannot lower welfare. Yet, laws worldwide restrict incentives for many transactions, partly due to an untested concern that incentives cause poor decisions. I show experimentally that incentives skew information gathering and beliefs about what a transaction entails in a way that causally influences the participation decision, as policy makers suspected. A model of costly information acquisition shows this behavior is consistent with rationality, and thus unconcerning from an ex ante welfare economic perspective, but demands consideration under reasonable alternatives. The mechanisms apply in any situation where incentives interact with information acquisition.
Ambühl, Sandro