Punishment, inequality, and welfare: a public good experiment

This paper reports the results of an experiment that investigates the two-sided relationship between punishment and welfare. First, it contributes to the literature on the behavioral determinants of punishment by examining the role of relative income and income comparisons as a determinant of punishment in a two-stage public good game when inequality arises endogenously from the subjects' behavior. Second, this paper investigates the impact of punishment on both absolute and relative incomes. We compare three treatments of our game. The Unequal Cost treatment replicates Fehr and Gächter (2000)'s experiment under a stranger matching protocol. The Equal Cost treatment is identical to the previous one except that the ratio between the cost of one punishment point to the punisher and its cost to the target equals one. The third treatment is similar to the second one except that a partner matching protocol is implemented in order to isolate strategic motives for punishment. Our results indicate that subjects punish even when they cannot alter the current distribution of payoffs. We also find that in all treatments, the intensity of punishment increases in the level of inter-individual inequality. Finally, despite its cost, punishment progressively improves welfare in association with a decrease in the aggregate level of inequality over time. JEL-Codes: A13, C92, D63