When Do Punishment Institutions Work?

While peer punishment sometimes motivates increased cooperation, it sometimes reduces cooperation. We use a lab experiment to study why punishment sometimes fails. We begin with a gift exchange game with punishment as it has typically been implemented therein since punishment has often backfired in this game. We modify two features of punishment that could increase its efficacy: punishment’s strength and its timing (whether the punisher publicly precommits to punishment or acts after the punishee). We replicate the result that peer punishment in gift exchange games can reduce cooperation, but show that this bad outcome disappears if punishment is more powerful. This does not seem primarily due to punishment’s threat leading to spiteful behavior: we find little evidence of spite, and the same punishment does not perform better when it is chosen after the fact. We find two main reasons that punishment decreases cooperation: lower wages are offered (a stick is substituted for a carrot); and many punishers don’t design punishment to properly incentivize high effort, particularly when punishment is weak in power. Punishment that is not publicly pre-committed is not effective in this game, even though this kind of punishment is similar to that used in public good games in the literature where punishment does seem to increase cooperation. The only punishment institution that increases cooperation is high-power punishment that is publicly pre-committed, which works through strong incentives rather than reciprocity. Finally, the existence of a punishment institution often decreases social surplus (when punishment-related losses are considered), although it may eventually increase social surplus if it is powerful and publicly pre-committed. JEL Classifications: D03, C91, D64, J49, H41