Encouraging compliance: bonuses versus fines in inspection games

In this paper we examine the effectiveness of bonuses and fines in an „inspection game‟, where costly inspection allows an authority to detect whether or not an individual complies with some standard of behavior. Standard game theoretic analysis predicts that in the inspection game non-compliant behavior is deterred by fines targeted at non-compliant individuals, but encouraged by bonuses awarded to compliant individuals. In an experiment we find that fines are effective in deterring non-compliance. However, in agreement with recent behavioral theories, we find that the effect of bonuses on compliance is much weaker than predicted.