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Encouraging Compliance: Bonuses Versus Fines in Inspection Games

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

This paper studies an “inspection game” where an individual can comply with some desired behaviour or not and an authority can inspect, at a cost, the individual to see if they have complied. Payoffs in the game are such that individuals prefer to comply if they are inspected and not comply if they are not inspected, while the authority prefers to inspect if the individual is non-compliant and not inspect if the individual is compliant. This general framework is relevant to a variety of topics, such as crime deterrence, tax compliance, and employee monitoring. Standard theory predicts that fines applied to those found to be non-compliant encourage compliance. Somewhat counter-intuitively, however, standard theory also predicts that bonuses awarded to those found compliant discourage compliance. The authors report an experiment conducted at the University of Nottingham that tests these predictions.

This paper, published in Journal of Law, Economics and Organization, reports an experiment in which human subjects were placed either in the role of individual or authority and paired to play the inspection game. Subjects were paid according to their decisions in order to reproduce the game’s incentives. In a baseline condition individuals complied about half of the time. Two further conditions added either a fine for individuals inspected and found non-compliant, or a bonus for individuals inspected and found compliant. In the condition with the additional fine the compliance rate increased to about 75%, as predicted. However, the counter-intuitive prediction about the effect of bonuses was not borne out by the data: the compliance rate was hardly affected by adding the bonus. In their paper the authors show that recent behavioral theories can explain these findings.

Journal of Law, Economics and Organization, “Encouraging Compliance: Bonuses Versus Fines in Inspection Games” by Daniele Nosenzo, Theo Offerman, Martin Sefton, and Ailko van der Veen.

http://jleo.oxfordjournals.org/content/early/2013/02/13/jleo.ewt001.abstract

 

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Posted on Wednesday 22nd July 2015

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