When externalities are present, private self-interest and overall group welfare may be at odds, with individuals having incentives to take actions that lower overall group payoff. Examples of situations of interest to economists where tension between individual and group-level incentives arises include cartel agreements, negative externalities from pollution, depletion of a common pool resource, and the private provision of public goods. In such cases, there are potential overall welfare gains from the creation of a social norm (1) and the imposition of a sanctioning system that penalizes behavior that deviates from the norm and imposes costs on the group. (2) The sanctions are intended to lower the return on self-interested behavior and increase the incentive to follow the behavioral norm.
Frequently observed types of sanctions that impose tangible costs of money or time on offenders include fines, incarceration, and economic boycotts. In this article we refer to sanctions where the cost is tangible to the punished actor as formal sanctions. Although such formal punishment systems can create strong incentives to behave in the group interest, one of their potential drawbacks is that it costly to apply the sanction to enforce the system. Both sanctioned offenders and those who pay for the process that imposes the sanction bear the cost. If the marginal benefit to the group from the increase in cooperative behavior does not more than offset the deadweight loss of implementing the sanction regime, the sanctioning system is inefficient.
As in Blau (1964), sanctions can also be informal in nature. In this article, we use the term informal sanctions to refer to penalties that do not impose tangible costs on the offender, though they may decrease his or her utility. Informal sanctions such as social disapproval, ostracism, gossip, peer pressure, or public embarrassment of offenders are often applied to try to alter behavior and in many cases appear to be effective. (3) These sanctions may originate with a public authority or with private individuals or organizations. They may be well organized or arise spontaneously. Such sanctions are typically not costly to apply. However, to be successful, they require offenders to exhibit changes in behavior in response to the sanction, an assumption that is more questionable with informal than with formal sanctions.
There are many examples in the field where both formal and informal sanctions are used in tandem to attempt to deter behavior that is viewed as antisocial, suggesting that informal sanctions have an additional benefit, even when a formal sanction is in effect. For example, policies against drug abuse, drunk driving, littering, and selling cigarettes to minors include formal official legal restrictions as well as informational campaigns designed to create an informal sanction against those breaking the law. In corporations and academic institutions, failure to perform a level of service activities viewed as appropriate may be penalized financially with lower salary increases or denial of promotion, but may also engender expressions of disapproval and a degree of social ostracism. In organizations such as the military and at some academic institutions, honor codes exist that can coincide with formal policies. One reason that these institutions label cheating and theft as honor code violations may be to create a social prohibition against them in addition to the explicit penalties in force. The publishing of the police crime blotter in local newspapers creates embarrassment for offenders in addition to any legal penalties they face. Tyler (1990) argues that social pressure, rather then the prospect of being penalized for noncompliance, is the major reason that laws are obeyed.
In this article, we report the results from a simple experiment that demonstrates that a sanctioning system combining formal and informal penalties can be more effective than a system where only one type of sanction is available. …