Testing a Fine Is a Price in the Lab

Abstract

Recent research in experimental law and economics shows that the imposition of a fine, intended to deter some harmful behavior, may crowd out moral motivation: the behavior occurs more frequently even though a payment is charged to discourage it. In A Fine is a Price, Gneezy and Rustichini (2000) suggest that the payment may induce subjects to frame the intended prohibition as a permission in exchange for a price. Obviously, the effect if confirmed may impact almost any form of public regulation or contract drafting. May fines charged for plastic bags in fact increase usage? May penalty clauses in contracts increase the likelihood of breach?

Our study tests this theory, distinguishing it from six alternative crowding-out mechanisms and from confounds in Gneezy and Rustichini’s original day-care study.

In our experiment, subjects are offered a contract to perform a real effort task. Subjects are paid upon the acceptance of the contract. If they breach the contract, they keep their payment, but burden their partner with an additional workload. We vary our treatments by specifying different amounts that subject need to pay if they do not perform: T1 specifies no payment, T2 stipulates a low fine disproportional to the extra workload imposed, and T3 stipulates a proportional fine; the payments go to the contractual partner.

We find the same mean performance level across all three treatments. However, splitting the sample according to the subjects’ social value orientation reveals a strong crowding-out effect in the pro-social group and an offsetting price effect for the pro-self players.

Our last treatment, T4, aims to identify the mechanism behind this crowding out effect. In this treatment, the payment is made to the experimenter, instead of the contractual partner as under T2 and T3. In the absence of a transfer between the parties, T4 forces subjects to view the fine as a penalty, instead of an exchange. Results show that T4 crowds in the pro-social subjects’ compliance, providing causal evidence for the Fine-is-a-Price hypothesis.