Sanctions are said to fail because of the "rally-round-the-flag effect". This is the main reason why many advocate the use of positive incentives as a viable alternative. Not only do rewards provoke no defensive reaction, but they may elicit a rally in support of compliance - a "fifth-column effect." Yet, positive incentives are vulnerable to extortion - doing wrong in the hope of obtaining larger rewards. As a result, many conjecture that sanction threats and promises of reward are most efficient when used simultaneously. We put this conjecture to a test, staging a formal confrontation of the two forms of incentives. Our model pits a sanctioner and a target in a game allowing for the possibility of rally-round-the-flag, fifth-column, and extortion effects. The game yields unambiguous results: under no circumstances should a sanctioner prefer sanction threats to reward promises. This result holds despite the risk of extortion, a risk that proves to be less of a drawback than the rally round the flag.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics