Monetary incentives such as punishment and reward are widely used to enforce cooperation. Previous research in this area has generally focused on how incentives change monetary payoffs of actions. Recently, scholars have conducted experimental research suggesting that the effectiveness of punishment depends on its ability to express norms. This research contributes to this emerging literature by offering further evidence on how to improve the effectiveness of incentives by highlighting their communication role. The research team investigates how profitability of punishment diminishes the norm communication role of punishment and therefore mitigates punishment?s efficacy. Topics include how the norm communication role of incentives can be affected by the framing of incentives (e.g., a tax or a punishment) as well as by how the incentive is implemented (e.g. public vs. private). The project studies how the signaling role of reward can be a useful tool for improving reputation feedback systems and solving the moral hazard problems in settings with asymmetric information.
The ultimate goal is to contribute to understanding how to maintain social order and norm obedience in society and markets and to help answer such questions as: 1) why norm violations are long-lasting in corrupt societies; 2) how tax and punishment achieve different outcomes even though each changes the payoffs of the target behavior in the same way; and 3) how the market itself can solve the moral hazard problem. The findings of these studies will have broad policy implications for all who use incentives to promote cooperation, and will likewise demonstrate the importance of certain communication previously ignored aspects of monetary incentives.
How incentives influence behavior is a core issue in economics. Previous research on incentives has focused on how incentives change payoffs of target behavior. This project investigates the communication function of incentives in decision making and thus contributes to our understanding of incentive effect. We develop controlled experiments for examining the communication function of monetary incentives and their policy implications. First, we investigated punishment’s efficacy when it is profitable for the punisher. We offer evidence that a profit motive for enforcement diminishes punishment’s ability to express norms, and impedes its efficiency. Next, we investigated different methods of implementing incentives with an eye towards their effect on norm expression and consequent implications for behavior. For example, we argue that publicly (but anonymously) implemented punishment, unlike private punishment, can promote the salience of violated social norms both to those who receive punishment and to those who observe it. We show that when incentives are weak, promoting norms publicly plays a prominent role in determining punishment’s overall efficiency. Finally, in addition to expressing social norms, monetary incentives also have the ability to signal individual preferences. For example, when a person chooses to reward a certain behavior, she signals that she approves of the rewarded behavior. We provide both theory and experimental evidences that the signaling role of reward can be a useful tool for improving reputation feedback systems and solving the moral hazard problem in asymmetric information settings. Empirical research on the communication function of monetary incentives remains very limited. This research combined psychology, law and economics to address a number of important and relevant policy questions, and also laid the foundation for future theory on the impact of incentives on behavior.
