Communication Value of Monetary Incentives in Enforcing Cooperation

Carnegie Mellon University, Pittsburgh PA

Investigators

Abstract

Monetary incentives such as punishment and reward are widely used to enforce cooperation. Previous research in this area has generally focused on how incentives change monetary payoffs of actions. Recently, scholars have conducted experimental research suggesting that the effectiveness of punishment depends on its ability to express norms. This research contributes to this emerging literature by offering further evidence on how to improve the effectiveness of incentives by highlighting their communication role. The research team investigates how profitability of punishment diminishes the norm communication role of punishment and therefore mitigates punishment?s efficacy. Topics include how the norm communication role of incentives can be affected by the framing of incentives (e.g., a tax or a punishment) as well as by how the incentive is implemented (e.g. public vs. private). The project studies how the signaling role of reward can be a useful tool for improving reputation feedback systems and solving the moral hazard problems in settings with asymmetric information. The ultimate goal is to contribute to understanding how to maintain social order and norm obedience in society and markets and to help answer such questions as: 1) why norm violations are long-lasting in corrupt societies; 2) how tax and punishment achieve different outcomes even though each changes the payoffs of the target behavior in the same way; and 3) how the market itself can solve the moral hazard problem. The findings of these studies will have broad policy implications for all who use incentives to promote cooperation, and will likewise demonstrate the importance of certain communication previously ignored aspects of monetary incentives.