We experimentally investigate the effects of sanctions when there are multiple equilibria. Two subjects play a two-period minimum effort game in the presence of third player (principal). The principal benefits from coordination on higher effort, and is the only one informed of previous choices choices. We contrast introducing an exogenously imposed sanction in the second round to the case where the principal is allowed to decide whether or not, at a small cost, to impose a sanction. We find that exogenously introduced sanctions are effective in inducing optimistic beliefs about others and help coordination on more efficient equilibria. On the other hand, endogenously introduced sanctions negatively influence beliefs about the effort of the other player. The results supports the idea that sanctions have an expressive dimension which can undermine their effectiveness by discouraging optimistic players.
We run an experiment in which two subjects play a two-round minimum effort game in the presence of a third player (principal) who is the only one informed about past effort choices and benefits from a higher minimum effort of the others. Sanctions introduced in the second round by the experimenter lead to more optimistic beliefs and higher efforts. This is not true when sanctions have been imposed by the principal. The possibility that the choice of a sanction is a signal of low effort levels causes players who chose high effort in the first round to be less optimistic.
Sanctions, beliefs, expressive law, deterrence, coordination, minimum effort game
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