The Carrot or the Stick: Rewards, Punishments and Cooperation

We examine demands for rewards and punishments in a simple proposer-responder game. The proposer first makes an offer to split a fixed-sized pie. According to the 2 × 2 design, the responder is or is not given a costly option of increasing or decreasing the proposer’s pay-off. We find substantial demands for both punishments and rewards. While rewards alone have little influence on cooperation, punishments have some. When the two are combined the effect on cooperation is dramatic, suggesting that rewards and punishments are complements in producing cooperation. Providing new insights to what motivates these demands is the surprising finding that the demands for rewards depend on the availability of punishments. ∗This paper was written while Harbaugh and Vesterlund were visiting the Center on Philanthropy and the Department of Economics at IUPUI, and while Vesterlund later was visiting Harvard Business School. We are grateful for their hospitality and financial support. We also acknowledge support from the National Science Foundation. Finally