Dynamic effects of enforcement on cooperation.

In situations where social payoffs are not aligned with private incentives, enforcement with fines can be a way to sustain cooperation. In this paper we show, by the means of a laboratory experiment, that past fines can have an effect on current behavior even when no longer in force. We document two mechanisms: (i) Past fines affect directly individuals' future propensity to cooperate, and (ii) when fines for noncooperation are in place in the past, individuals experience higher levels of cooperation from partners and, consistent with indirect reciprocity motives, are in turn nicer toward others once these fines have been removed. This second mechanism is empirically prevalent and, in contrast with the first one, induces a snowball effect of past enforcement. Our results can inform the design of costly enforcement policies.