WHY REWARDS ARE BETTER THAN SANCTIONS

Sanctions are said to fail because of the “rally‐round‐the‐flag effect”. This is the main reason why many advocate the use of positive incentives as a viable alternative. Not only do rewards provoke no defensive reaction, but they may elicit a rally in support of compliance – a “fifth‐column effect.” Yet, positive incentives are vulnerable to extortion – doing wrong in the hope of obtaining larger rewards. As a result, many conjecture that sanction threats and promises of reward are most efficient when used simultaneously. We put this conjecture to a test, staging a formal confrontation of the two forms of incentives. Our model pits a sanctioner and a target in a game allowing for the possibility of rally‐round‐the‐flag, fifth‐column, and extortion effects. The game yields unambiguous results: under no circumstances should a sanctioner prefer sanction threats to reward promises. This result holds despite the risk of extortion, a risk that proves to be less of a drawback than the rally round the flag.