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Punishment and Norm Compliance
Daniel Houser
Professor of Economics
Director, Interdisciplinary Center for Economics Science
George Mason University, Fairfax, VA
motivation Sanctions are widely used to enforce
cooperation and solve asymmetric information problems.
Evidence shows that people do not always act to avoid punishment. Two primary reasons: Incentive effects and Intention effects.
related studiesDetrimental Incentive Effects: Extrinsic incentive tends to reduce intrinsic motivation
Frey and Oberholzer-Gee,1997Deci, et al, 1999Gneezy and Rustichini, 2000
Intention Effects:Imposing sanctions can be seen as a signal of distrust.
Fehr and Falk, 2002Intentions play an important role in shaping decisions.
Rabin, 1993McCabe, Rigdon and Smith, 2003
incentive effectsFrey and Oberholzer-Gee (1997) Survey Swiss government intends to build two repositories to store
nuclear waste. Two adjacent communities have been designated as potential sites.
In 1993, 305 interviews. Ask respondents if they were willing to permit the construction
of a nuclear waste repository of short-lived, low- and mid- level radioactive waste on the grounds of their community.
Either no compensation, or compensation of $2,175 to $4,350 for all residents in community.
0%
10%
20%
30%
40%
50%
60%
no compensation compensation
Acc
ept
rate
incentive effects
Gneezy and Rustichini (2000) 160 students at University of Haifa were
asked to answer a set of 50 questions taken from a IQ test.
Group 1: answer questions as they could Group 2: 0.1 NIS for each correct answer. Group 3: 1 NIS Group 4: 3 NIS
0
10
20
30
40
50
0 0.1NIS 1NIS 3NIS
Cor
rect
an
swer
incentive effects
Gneezy and Rustichini (2000) Donation experiment: collect donations. 180 high school children in Israel. Group 1: no payment Group 2: pay 1% of the amount collected Group 3: pay 10% of the amount collected
0
50
100
150
200
250
no payment 1% 10%
Ave
rage
am
ount
col
lect
ed
intention effects
McCabe, Rigdon and Smith (2003): Outcome-based model: inequality aversion. Intention-based model: players reading each
other’s motivation. Depending on the available alternatives, identical
outcomes may be interpreted differentially. (not the case in outcome-based model)
Intention Effects
Nelson (2002) Standard ultimatum game($20) vs. truncated
ultimatum game (maximum offer is limited to $4)
Houser, Xiao, McCabe and Smith (2008)
Goal: Assess the importance of incentives and intentions in cases where punishment does not promote norm compliance.
experiment design Intention Treatment. (Intention + Incentive)
Punishment is intentionally imposed by subjects.
Random Treatment. (Incentive) Punishment is randomly imposed by nature
Severity of Punishment. (Endogenously determined)Weak punishment: Punishment level<<cooperation costSevere punishment: Punishment level>cooperation cost
subjects’ comments (no sanction)
“I did not return the desired amount, but I did return to Actor 1 (investor) the amount he/she transferred. Though I could have kept all the money. I suspect I would feel guilty about it…. The decision by Actor 1 not to impose the payoff cut definitely influenced me to give him/her back some of the money. Since the penalty is purely punitive.. I would not have any feeling of guilt about not sharing the money.”
“I gave Actor 1 $5 and they had asked for $6…had they imposed the payoff cut, I would have transferred $0 back and paid the $4 fee because it would have cost me less.”
“I sent back ½ of what they wanted so they ended up getting something…” (Random)
subjects’ comments (sanction)
“…I would make less if I return her desired amount….if she/he didn’t choose the payoff cut I would send back some money to her.”
“…I was assigned the cut, however, by them requesting 20E$ back, it was better off for me to give them nothing and pay my 4E$ fee”.
results
Punishment incentives matter most
Mean returns change under the threat of punishment, and in the same way regardless of whether the punishment was chosen by the investor or by nature.
The amount transferred does not affect the percentage of tripled amount returned.
0
10
20
30
40
50
60
0 2 4 6 8 10
Investment Amount
Ave
rage
Ret
run
(%)
Intention Not punished
Random Not punished
Intention Punished
Random Punished
Return Percentage of Tripled Investment Amount(Intention vs. Random)*
(Request≥8)
Low Request
* At least 20 observations in each cell. Excludes cases where request > 2/3 investment.
(Request<8)
High Request
results
Punishment: get what you want or nothing at all
When not threatened with punishment, the most common decision is to return something but not everything requested. This behavior is least
common under threats of punishment.
0
20
40
60
80
Not punished Punished Not punished Punished
Low Request High Request
Distribution of Cooperative Types
Complete Defection (Return=0)
Middle (0<Return<Request)
Complete Cooperation (Return>=Request)
Per
cent
age
Severe punishment Weak punishment
discussion Cooperation is more likely under threats of severe
punishment. But severe punishment can be difficult to enforce, and consequently not credible, outside of the laboratory.
Weak punishment is credible but risky: it can have detrimental effects on human cooperation.
Why does punishment fail to promote cooperation?
Our results suggest incentives can crowd-out norm based social motivations.
Imaging study could shed important light on this issue
Li, Xiao, Houser and Montague (2008)
Neuroeconomic investigation of why punishment fails to promote cooperation in a particular trust and reciprocity context.
Provide evidence on the “perception shift” (framing/crowding out) explanation for the failure of weak sanctions to promote cooperation. Adding sanction threats to a social environment
creates a business environment that promotes self-interested decision making.
neuroeconomics evidence
Sanfey et al (2003) de Quervain et al (2004) Knoch et al (2006)
All involve neural activity associated with the punishment decision
Spitzer et al (2007) Neurocorrelates of punishment threats that
promote norm compliance.
hypothesis
When sanctions are not imposed, (social) reward system will be active in making decisions VMPFC (McCabe, et al 2001) LOFC (Montague and Lohrenz, 2007; Spitzer et al,
2007) Amygdala PCC (McClure et al, 2004)
When sanctions are imposed, social reward system will be relatively less active, and parietal areas will be relatively more active (Platt and Glimcher, 1999)
fMRI design
Use Fehr and Rockenbach design Two subjects anonymously matched, one as
investor and one as trustee Play game 10 times Only trustee is scanned
Figure 1
Investor’s request
trustee’s repayment trustee’s repayment
sanction no sanction
Investor’s investment(out of $10)
freeresponse
investmentmade
repaymentmade
~ 18 s
requestmade
sanction optionselected
~ 8 s
~ 16 s
freeresponse
freeresponse
freeresponse
~ 28 s
Timeline
InvestmentMade
RepaymentMade
8s 8 s8 sfreeresponse
freeresponse
InvestmentCue
RepayCue
8sfreeresponse
RequestCue
Totalsrevealed
ThreatCue
freeresponse
8 s
RequestMade
Whether SanctionDecided
Kept Gave
3 7
invest request sanction /no sanction
?Gave
7
Kept
14
repayment
SOM Figure 2
data
•104 participants, 52 Investors and 52 Trustees
•For Trustees:•Ages 18-35, mean age 25•25 females•Normal or corrected vision•No neurological or psychiatric conditions•No brain abnormalities
Table 1
Average behavior and payoff of investors and trustees
Sanction No-sanction Significance
Investment
Request/(3*Investment)
Request
Repayment
Repayment/(3*Investment)
Repayment/Request
Investor’s Payoff
Trustee’s Payoff
4.89 7.09 *
10.06 13.89 --
0.72 0.64 *
6.05 12.04 --
0.46 0.55 *
0.67 0.89 *
11.58 14.95 *
17.01 19.22 --
* Indicates statistically significant
0
5
10
15
20
25
0 2 4 6 8 10
Profit-split
investor’s request in sanction condition
Investor’s request in no sanction condition
0
5
10
15
20
25
0 2 4 6 8 10
investment-split
repayment in sanction condition
repayment in no sanction condition
Mo
ney
un
it
Investment Investment
A B
Figure 2
Results
Brain responses differentially activated in sanction vs. no-sanction situations
Region of activation X Y Z voxels Z
peak MNI coordinates
Parietal Lobe (L) -24 -60 52 72 3.99
Parietal Lobe (R) 28 -48 40 81 4.13
Inferior Temporal Gyrus -44 -68 -4 67 4.10
Temporal Lobe 28 -68 20 27 3.29
Precentral Gyrus (R) 44 -4 36 68 3.97
Precentral Gyrus (L) -44 -8 36 80 3.79
Fusiform Gyrus (R) 36 -48 -16 18 3.63
Medial Gyrus -8 -24 68 17 3.30
Midbrain 4 -12 -12 59 4.17
Cerebellum 24 -48 -36 44 4.19
threat – non-threat
Regions with 5 or greater significant voxels were identified using T-test, p<0.005(uncorrected).
Table 3
Parietal Regions More Active when Sanctions Threatened
no-sanction sanction
% s
ign
al c
han
ge
time (s)
0 4 8 12
-.1
0
.1
.2
A
B
X = 4 Z = -4
VMPFC
Y = 0 Amygdala
T501
PCC
LOFC
VMPFC LOFC Amygdala PCC
Figure 3
Social Reward Networks Active when Sanctions not Threatened
Figure 4
B Y = 56
-0.2
0.0
0.2
0.2 0.4 0.6 0.8 1.0
no sanction
sanction
% c
ha
ng
e o
f V
MP
FC
ac
tiv
ity
repayment ratio
A
-0.1
0
0.1
0.2
0.2 0.4 0.6 0.8 1.0
% c
ha
ng
e o
f D
LP
FC
ac
tiv
ity
repayment ratio
Z = 16
Trustees’ Brain Regions Exhibiting Parametric Correlation Backtransfer Amount
conclusions Credible threats of sanctions perhaps generate a “cognitive shift”
that diminish social motivations and promote selfish behaviors
Absent sanctions, our data show a consistent activation pattern in areas previously been linked to social reward processing: LOFC, VMPFC, Amygdala.
Imposing sanctions suppresses the social network and parietal areas play a greater role in decision making.
Regardless of sanctions, activation in VMPFC correlates positively with trustee altruism. The sanction/no-sanction signal modulates baseline activity of VMPFC, but does not affect the correlation.