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.