Third Party Reward and Punishment: Group Size, Efficiency and Public Goods

Abstract

Costly third party punishment has been interpreted as a tool for studying the enforcement of social norms. Experiments on this topic typically involve a third party observer who can pay to decrease the payoff of a player who has behaved selfishly (or generously) toward another. We investigate whether third parties are also willing to engage in costly rewarding, and whether third party responses are sensitive to the number of players affected by the selfish or generous action. Using the ‘dictator game’, where one player (the dictator) divides a sum of money between herself and a recipient, we allowed dictators to be selfish, fair, or generous. Unlike in other experiments, third parties then had the choice to either punish or reward the dictator. Across all variations, responses followed a consistent and intuitive pattern: selfish behavior was punished while generous behavior was rewarded. Not only were third parties willing to engage in costly rewarding, but rewards were in fact more common than punishments. Furthermore, third party response was more pronounced when the dictator transfer had the non-rivalrous character of a public good, in the sense that both (a) the number of recipients increased and (b) the dictator's transfer was multiplied by a constant factor, so that the larger number of recipients did not reduce potential payoff of each recipient. Third party response did not change significantly when either of these manipulations was performed alone, suggesting a particular sensitivity to situations involving a public good.

Keywords: Dictator Game, Norm Enforcement, Reciprocity

JEL Classification: H41