Inducing Good Behavior: Bonuses versus Fines in Inspection Games

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

No 2010-21, Discussion Papers from The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham

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.

Keywords: Inspection Games; Costly Monitoring; Rewards and Punishments; Bonuses and Fines; Quantal Response Equilibrium; Impulse Balance Equilibrium; Experiment (search for similar items in EconPapers)
JEL-codes: C70 C72 C92 (search for similar items in EconPapers)
Date: 2010-12
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Citations: View citations in EconPapers (1)

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