Fine as a Nudge: Experimental Evidence

Abstract

Fine can be a price but to what extent? More importantly, do fines act as nudges to provoke behavior in long run? In this study, we attempt to answer these questions. Based on the arguments made by Gneezy and Rustichini (2000) who provide evidence against the deterrent hypothesis that suggests that a penalty that leaves everything else unchanged reduces the occurrence of the behavior subject to the fine. In this paper, we empirically examine the model suggested by Lin and Yang (2006) that provides a complementary explanation and qualifies but does not lose the predictive power of the deterrence hypothesis. Employing experimental approach for controlled and uncontrolled groups of graduate students, we explore as to what extent individuals perceive monetary penalty as a deterrent. We examine that the amount of fine, significance of it’s with respect to the overall payoff, and the type of fine needs to be taken into consideration before generalizing the above hypothesis. Our empirical experimental evidence suggests that the subjects show a higher propensity to comply with the stipulated norm that “they should not avoid the rules” in a peer-influenced environment than when subjected to isolated experiments. Our results further reveal that their tendency to pay fine and get away with the situation is inversely related with the quantum of fine imposed and directly correlated with the frequency of the rule-breaking behavior. These results confirm the findings of Lin and Yang (2006) that penalty should be substantial enough to deter the individuals, rather than just fining them for the sake of penalty. Finally, we argue that the theory of “fine is a price” doesn’t just apply to a single kind of event or model. It can be observed that such trends are also followed up in many another set up too. In case of a multi-step game, we observed that people often tend to go for paying up a penalty if they are going to get the better payoff after subsequent events.

Keywords: Nudges; Personal finance; Behavioural finance; Experimental finance;

JEL Classification: D53, G12, G41