The Social Limits of Incentives: Embeddedness and the Scope Conditions of Economic Theory

Economic theory expects individuals to respond decisively to financial incentives, yet empirical research often finds surprisingly small elasticities. This essay argues that such weak effects are often evidence that economic action is mediated by social structure. I develop a framework of socially attenuated incentives in which embeddedness raises the relational, reputational, and identity costs of acting on financial incentives, thereby weakening responsiveness to incentives. Incentive-only models resemble gravity-only physics: powerful under idealized conditions but incomplete in socially dense environments. Small elasticities are often the empirical traces of embeddedness. I formalize this argument with a simple model and illustrate it across multiple domains: consumer transactions, tax migration among top earners, and labor supply responses to unemployment insurance. In contrast, private equity buyouts in some sectors demonstrate how profits can be generated by dismantling embedded constraints and intensifying high-powered incentives, a process of disembedding arbitrage. Together, these cases offer a research agenda for economic sociology focused on the social conditions that attenuate or reshape the force of incentives in economic life.