Can sanctions induce pessimism? An experiment

Abstract

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.