Do Fines Deter Unethical Behavior? The Effect of Systematically Varying the Size and Probability of Punishment

Abstract

Unethical behavior is widespread, with large economic consequences. Understand- ing how to deter it is important. In experiments in which participants can lie to achieve an economic advantage, we systematically vary the fine and probability associated with being audited. In all our experiments, lying decreases with the size of the fine. For probabilities, the results are mixed: when participants decide only once, and deterrence parameters are presented in isolation, lying behavior is insensitive to changes in detection probabilities. However, when individuals can compare different detection probabilities, or when they experience the same probability level over time in a repeated setting, lying decreases with higher detection probabilities. In all settings, changes in the magnitude of fines are more effective than equivalent changes in expected earnings obtained by altering the probability of punishment. We organize previous findings in light of our results and propose policy interventions aimed at deterring unethical behavior.

Keywords: Deception, Deterrence, Lab Experiment, Unethical Behavior, Risk, Punishment

JEL Classification: D91, C91, D81