CeDEx
Centre for Decision Research and Experimental Economics
   
   
  

CeDEx 2010-21: Inducing Good Behavior: Bonuses versus Fines in Inspection Games

Abstract

We examine the effectiveness of bonuses and fines in an ‘inspection game’ where an employer can learn the effort of a worker through costly inspection. Standard game theoretic analysis predicts that fines discourage shirking, whereas bonuses encourage shirking. In contrast, ownpayoff effects suggest that both fines and bonuses discourage shirking. In an experiment we find that fines are more effective than bonuses in reducing shirking. However, we do not find that bonuses encourage shirking. Behavioral theories based on Impulse Balance Equilibrium or Quantal Response Equilibrium provide a good account of deviations from Nash equilibrium predictions.

Download the paper in PDF format

Now published in Journal of Law, Economics, and Organization

Authors

Daniele Nosenzo, Theo Offerman, Martin Sefton and Ailko van der Veen

 

View all CeDEx discussion papers | View all School of Economics featured discussion papers

 

Posted on Wednesday 1st December 2010

Centre for Decision Research and Experimental Economics

Sir Clive Granger Building
University of Nottingham
University Park
Nottingham, NG7 2RD

telephone: +44 (0)115 951 4763
Enquiries: suzanne.robey@nottingham.ac.uk
Experiments: cedex@nottingham.ac.uk