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Inducing Good Behavior: Bonuses versus Fines in Inspection Games

Author

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  • Daniele Nosenzo

    (School of Economics, University of Nottingham)

  • Theo Offerman

    (CREED, Department of Economics, University of Amsterdam)

  • Martin Sefton

    (School of Economics, University of Nottingham)

  • Ailko van der Veen

    (CREED, Department of Economics, University of Amsterdam)

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.

Suggested Citation

  • Daniele Nosenzo & Theo Offerman & Martin Sefton & Ailko van der Veen, 2010. "Inducing Good Behavior: Bonuses versus Fines in Inspection Games," Discussion Papers 2010-21, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    • Handle: RePEc:not:notcdx:2010-21
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    References listed on IDEAS

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    More about this item

    Keywords

    Inspection Games; Costly Monitoring; Rewards and Punishments; Bonuses and Fines; Quantal Response Equilibrium; Impulse Balance Equilibrium; Experiment;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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