The overjustification effect occurs when an expected external incentive such as money or prizes decreases a person's intrinsic motivation to perform a task. Overjustification is an explanation for the phenomenon known as motivational "crowding out". The overall effect of offering a reward for a previously unrewarded activity is a shift to extrinsic motivation and the undermining of pre-existing intrinsic motivation. Once rewards are no longer offered, interest in the activity is lost; prior intrinsic motivation does not return, and extrinsic rewards must be continuously offered as motivation to sustain the activity.

The overjustification effect has been widely demonstrated in many settings. In one of the earliest demonstrations of this effect, Edward Deci and his colleagues conducted a laboratory experiment in 1971 where subjects showing baseline interest in solving a puzzle were exposed to two different conditions. The control group were not paid on all three days while the experimental group were not paid on the first day, were paid on the second day and were not paid again on the third day. The subjects were given a break in the middle of each session and were being observed while doing whatever they wanted. The results showed that the experimental group spent significantly more time than the control group playing the puzzle during their break time on day 2 when they were paid but significantly less on day 3 when they were not paid. This was interpreted as evidence that the extrinsic monetary reward significantly reduced their intrinsic motivation to engage in the task.

Researchers at Southern Methodist University conducted an experiment on 188 female university students in which they measured the subjects' continued interest in a cognitive task (a word game) after their initial performance under different incentives. The subjects were divided into two groups. Members of the first group were told that they would be rewarded for competence. Above-average players would be paid more and below-average players would be paid less. Members of the second group were told that they would be rewarded only for completion. Their pay was scaled by the number of repetitions or the number of hours playing. Afterwards, half of the subjects in each group were told that they over-performed, and the other half were told that they under-performed, regardless of how well each subject actually did. Members of the first group generally showed greater interest in the game and continued playing for a longer time than the members of the second group. "Over-performers" continued playing longer than "under-performers" in the first group, but "under-performers" continued playing longer than "over-performers" in the second group. This study showed that, when rewards do not reflect competence, higher rewards lead to less intrinsic motivation. But when rewards do reflect competence, higher rewards lead to greater intrinsic motivation.

Richard Titmuss suggested that paying for blood donations might reduce the supply of blood donors. To test this, a field experiment with three treatments was conducted. In the first treatment, the donors did not receive compensation. In the second treatment, the donors received a small payment. In the third treatment, donors were given a choice between the payment and an equivalent-valued contribution to charity. None of the three treatments affected the number of male donors, but the second treatment almost halved the number of female donors. However, allowing the contribution to charity fully eliminated this effect.

According to self-perception theory, a person infers causes about his or her own behavior based on external constraints. The presence of a strong constraint (such as a reward) would lead a person to conclude that he or she is performing the behavior solely for the reward, which shifts the person's motivation from intrinsic to extrinsic.

Laboratory studies in the 1970s indicated that individuals under conditions with extrinsic rewards showed diminished intrinsic motivation. Deci and his colleagues (e.g., Deci and Ryan 1985) developed the cognitive evaluation theory to explain the results. As a sub-theory of self-determination theory, cognitive evaluation theory explains that both control and competence underlie intrinsic motivation and how extrinsic rewards affect intrinsic motivation is dependent on the individual's interpretation. Intrinsic motivation increases if individuals interpret rewards as pertaining positive information about their own competence and self-control over results, whereas if they interpret the results as indicative of external control, this decreases their feelings of self-control and competence, which in turn decreases intrinsic motivation. Cognitive evaluation theory also suggests social context as another implication on intrinsic motivation. Social cues can exert either positive or negative effects on intrinsic motivation depending on the messages that the context conveys regarding a person's autonomy and competence. Verbal rewards such as positive feedback and praise are predicted to be experienced as controlling hence decreasing intrinsic motivation. However, verbal rewards that are informational and not experienced as controlling are predicted to exert positive effects.

Self-determination theory is a broad theory of motivation in work organizations that maintains the predictions of cognitive evaluation theory but also recognizes the limitations of the theory, such as organizational conditions under which predictions do not apply or are less relevant in real-world settings, which cognitive evaluation theory fails to recognize. The theory differentiates between various types of motivational states, distinguishes the organizational conditions where extrinsic rewards are more effective than intrinsic rewards, examines individual differences in orientation toward intrinsic versus extrinsic motivation and discusses managerial behavior that can enhance intrinsic motivation. Findings from the Deci et al. (1989) study have supported self-determination theory as an approach to work motivation by showing how managers can impact the work attitudes of their employees. The study reported that managerial autonomy support which included provision of options, giving relevant information in a non-autonomous way, acknowledging subordinates' perspectives and cultivating self-initiation resulted in employees having more positive work-related attitudes such as higher level of job satisfaction and increased level of trust in corporate management.

The overjustification effect is controversial because it challenges previous findings in psychology on the general effectiveness of reinforcement on increasing behavior, and also the widespread practice of using incentives in the classroom. These findings fail to account for situations whereby the nature of activities differ, such as in cases where the initial level of intrinsic interest in the activity is very low, introducing extrinsic contingencies may be essential for producing involvement. These conclusions were challenged in a separate meta-analysis which found that tangible rewards offered for outperforming others and for performing uninteresting tasks (in which intrinsic motivation is low) lead to increased intrinsic motivation, and stated that the detrimental effects of rewards on motivation only occur in a specific, restricted set of conditions that could be easily avoided. This set of analyses included both high-interest and low-interest tasks, whereas the original meta-analyses conducted by Deci and colleagues (1999) restricted analyses to tasks in which participants initially had high interest. In fact, a 2001 meta-analysis showed that rewards can increase intrinsic motivation for tasks that initially hold little intrinsic interest.