IZA DP No. 13977: Fraud Deterrence Institutions Reduce Intrinsic Honesty
revised version published in: Economic Journal, 2021, 131 (638), 2508-2528.
Deterrence institutions are widely used in modern societies to discourage rule violations but whether they have an impact beyond their immediate scope of application is usually ignored. Using a quasi-experiment, we found evidence of spillover effects across contexts. We identified fraudsters and non-fraudsters on public transport who were or not exposed to ticket inspections by the transport company. We then measured the intrinsic honesty of the same persons in a new, unrelated context where they could misappropriate money. Instead of having an expected educative effect across contexts, the exposure to deterrence practices increased unethical behavior of fraudsters but also, strikingly, of non-fraudsters, especially when inspection teams were larger. Learning about the prevailing norm is the most likely channel of this spillover effect.