Allowance Economics: Candy, Taxes And Potty Training

toggle caption Courtesy of Joshua Gans

The first opportunity Joshua Gans had to really test the power of economic incentives came when his daughter was 2 years old. Gans is an economist -- an expert in incentives. He talks about them all the time in the classroom at the University of Melbourne in Australia, where he's a professor.

So when the time came to potty train his daughter, B., he designed what seemed like an economically rational incentive: B. would receive a jelly bean every time she went to the toilet.

Once the new policy was in place, B. suddenly had to go to the toilet really, really often.

A few years later, B.'s younger brother needed to be potty trained. And Gans decided to expand the incentive system: Every time B. helped her brother go to the bathroom, she would get a treat.

"I realized that the more that goes in, the more comes out," says B., who is now 11. "So I was just feeding my brother buckets and buckets of water."

"It didn't really work out too well," Gans says.

As B. grew up, she started asking for things -- yo-yos, candy, a pair of those shoes with wheels on them. So Joshua began to think about a new economic tool: allowance.

Parents generally use allowance in one of two ways. It can be a reward for services provided -- using the toilet, washing dishes, making the bed. Gans ruled out this option after his failed attempt to incentivize potty training.

Instead, he went with option 2: allowance as a tool to teach kids about budget constraints. He declared that B. would get a fixed allowance, to be used for all nonessential purchases.

But what counts as nonessential?

"A child comes forward with a very nice dress that she's found in the store, and we think, 'Oh, we agree that's nice as well,' and all of a sudden the credit card is out," he says. "Ones we don’t like, then it's far more likely to go straight to allowance."

This, it turns out, is an issue that governments face all the time. People in society want things that the people in power don't always like -- things that harm the environment, or things that are bad for your health, like cigarettes.

Or, in B.'s case, candy.

So Gans came up with a special incentive plan for candy. If B. wanted to buy candy, she would have to pay her parents a 100 percent tax, effectively doubling the cost.

The tax was based on how much B.'s candy consumption would add to the family's health costs, because of increased dental visits and the like. As it turned out, Gans never earned any revenue from the tax -- because B. never bought candy with her allowance.

"I realized that's just a ripoff," B. says. "Why would I want the candy then?"

Of course, just as people evade government regulation by crossing state lines for cigarettes or fireworks, B. can go to her grandmother's for tax-free candy.

Gans, meanwhile, remains faithful to the idea of incentives driving behavior. But he's a little more wary about his ability to use them to get what he wants.

Planet Money Questions of the Day: What economic incentives have you used with your kids? What incentives did your parents use with you?

For more: Listen to our podcast on Gans and B., and check out Gans' book Parentonomics.