Deterrence by Imperfect Sanctions – A Public Good Experiment

Abstract

Sanctions are often so weak that a money maximizing individual would not be deterred. In this paper I show that they may nonetheless serve a forward looking purpose if sufficiently many individuals are averse against advantageous inequity. Using the Fehr/Schmidt model (QJE 1999) I define three alternative channels: (a) identical preferences are common knowledge, but inequity is not pronounced enough to sustain cooperation; (b) heterogeneous preferences are common knowledge; (c) there is preference uncertainty. In a linear public good with punishment meted out by a disinterested participant, I test two implications of the model: (a) participants increase contributions in reaction to imperfect punishment; (b) imperfect punishment helps sustain cooperation if participants experience free-riding.

Keywords: Deterrence, Public Good Experiment, Inequity Aversion, imperfect sanction, Fehr/Schmidt preferences, centralized punishement

JEL Classification: H41, D63, K42, C91, D03, K14, K13