Reward, punishment and probabilities in policy measurements: An extra laboratory experiment about effectiveness and efficiency of incentives in palm oil production

Palm oil production creates negative externalities, e.g. through intensive fertiliser application. If policy wants to determine externalities an effective and efficient measurement seems desirable. Embedded in an extra laboratory field experiment on Sumatra, a business simulation game tests several incentives for reducing the use of fertiliser. These incentives are differently designed, i.e., either reward or punishment, varying in their magnitude and probability of occurrence but constant in the effect on expected income. Results show that participants react significantly different depending on the incentive design. A high reward with a low probability to occur was found to be the most effective and sustainable incentive design. For efficiency, a low and certain reward is indicated to be the best design.