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A Fine is a Price

Technion—Israel Institute of Technology, Haifa, Israel, and CentER for Economic Research, Tilburg University, The Netherlands, respectively. We thank David Easley, Patrick Francois, Edward Glaeser, David Levine, Ellen Nyhus, Tom Palfrey, Eric Posner, Luca Rigotti, José Scheinkman, Peyton Young, Paul Webley, numerous seminar audiences, and an anonymous referee for very useful conversations and comments on the interpretation of the results in our study.

The deterrence hypothesis predicts that the introduction of a penalty that leaves everything else unchanged will reduce the occurrence of the behavior subject to the fine. We present the result of a field study in a group of day‐care centers that contradicts this prediction. Parents used to arrive late to collect their children, forcing a teacher to stay after closing time. We introduced a monetary fine for late‐coming parents. As a result, the number of late‐coming parents increased significantly. After the fine was removed no reduction occurred. We argue that penalties are usually introduced into an incomplete contract, social or private. They may change the information that agents have, and therefore the effect on behavior may be opposite of that expected. If this is true, the deterrence hypothesis loses its predictive strength, since the clause “everything else is left unchanged” might be hard to satisfy.