Is Compensation Fine? Sanction Schemes and their Effects on Deterrence and Trust

Both fine and compensation payments are commonly used to sanction misbehaviour. Interestingly, they are typically not consistently applied across different jurisdictions and their comparative strengths and weaknesses are empirically not yet well established and understood. Our experiment allows us to, on the one hand, contrast the compliance-inducing effects of fines and compensation on potential infringers. On the other hand, it enables us
to examine their respective capabilities to maintain or restore potential victims’ trust. We find that fines induce more compliance than compensation. This is, however, only partly reflected in potential victim’s trust. It appears that the higher levels of trust we observe in the fine regime are not necessarily a consequence of the sanction scheme itself, but rather because individuals experience less misbehaviour in that regime.