10/22/2012 03:50 pm ET Updated Dec 22, 2012

How to Make Iranian Sanctions More Effective: Lessons From Behavioral Economics

Several days ago, with its currency in free-fall, Iran cited a recent International Monetary Fund prediction of 2013 economic growth as evidence that international sanctions against it were ineffective. When Barack Obama and Mitt Romney face off for the presidential debate on foreign policy tonight, we can expect that each candidate will be asked how he would deal with the Iranian nuclear program that these sanctions were meant to curb. Key to the candidates' positions will be the question of whether sanctions against Iran are "working," and whether these may still force Iran into accepting some sort of a negotiated settlement.

To evaluate Obama and Romney's Iran policies, viewers must understand what exactly it means for sanctions to "work." Economic coercion is a two-stage process. In the first stage, individual countries and international institutions implement measures designed to strangle the economy of a target country, including unilateral and multilateral sanctions. The second stage of the process occurs if and when the target of the sanctions changes its political behavior, and complies with the wishes of the international community.

Recent research in behavioral economics may help shed some light on why robust sanctions have not yet produced nuclear concessions from the regime. In a now classic paper, economists Uri Gneezy and Aldo Rustichini studied the role of economic punishments in a rather unlikely context: late pick-ups at Israeli preschools. Parents were expected to retrieve their children by 4 p.m., but some occasionally arrived late, forcing teachers to stay late as well. So, Gneezy and Rustichini examined whether the introduction of a fine would curb tardy behavior, and assessed a small penalty on late-comers at half of the preschools. Logically, one might expect that such a late fee would prompt parents to start showing up on time. But the exact opposite occurred: at the preschools where fines were levied, almost twice as many parents were tardy.

One reason for this shift can be found in the idea of social norms. Once an economic penalty was introduced into the equation, the fine now seemed like a price being paid for having the teachers continue to watch the children.

The international community is not Iran's parents, and nuclear proliferation is far more dangerous than a tardy preschool pick-up. Yet there is a widespread international norm against nuclear weapons acquisition, and Iran may well view economic punishment as a "fee" for its nuclear pursuits. Other regimes that have violated the international nonproliferation norms have also been subjected to serious sanctions. Saddam Hussein, Muammar Gaddafi, and Kim Jong-il were all sanctions targets because of their nuclear programs. There is no reason Iran should have expected its nuclear pursuits would be exceptions to this rule.

The "fee" has been raised substantially in the past few years, as the United States has led an international effort to isolate Iran, and evidence suggests that Iran has sped up its uranium enrichment. Like the tardy parents, the regime may calculate that if it is going to bear the burdens of economic punishment, it may as well get something for its money. So does this mean that Stage 2 is a pipe dream? That sanctions will never really "work"? Not necessarily. Gneezy and Rustichini speculated that if the tardy fees were very large, no parents would have arrived late, and there is evidence that extreme punishments can deter unwanted behavior.

Indeed, Iran may still change its behavior if the international community exerts pressure that goes beyond its expectations. For sanctions to cause unexpected pain, the U.S. and its allies will need to close loopholes in the existing sanctions, and they may need to be in place for many months to exceed Iran's indifference point. Along these lines, the European Union has recently agreed to a package of sanctions that will, among other things, cut transactions with Iranian banks and place a more severe ban on Iranian gas exports. And just this weekend, reports suggested that Iran and the U.S. could resume direct talks after the election, although the White House has denied this.

So when the presidential candidates take the stage this evening, the question should not be whether Romney or Obama will stop Iran from going nuclear, but how. If either candidate can propose ways to make economic sanctions feel less like a fee for doing business and more like an exacting punishment, there is hope for a policy that may yet induce Iran to change its nuclear behavior.

Hal E. Hershfield is an Assistant Professor of Marketing at NYU's Stern School of Business, whose research focuses on judgment and decision-making and social psychology. Mira Rapp-Hooper is a Ph.D. student in political science at Columbia University. Her research focuses on deterrence and nuclear non-proliferation.