Carrots, sticks, and the multiplication effect

Although a punishment can be applied only once, the threat to punish (also referred to as stick) can be reiterated several times, because when parties obey, the punishment is not applied and thus the threat can be repeated. The same is not possible with promises to reward (also known as carrots), since they need to be carried on every time a party complies, and hence at each round a new reward is needed. We show that the multipliability of sticks has pervasive consequences in economics and law and provides a unified explanation for seemingly unrelated phenomena such as the dynamics of riots and revolutions, the divide-and-conquer strategy, comparative negligence, the anticommons problem, the use of property rules in markets, the most-favored nation clause, legal restrictions on penalties in employment contracts, and legal aid

When Will Judgment Proof Injurers Take Too Much Precaution?

Judgment proof injurers can be expected to take less than optimal precaution, as they bear only a part of the accident loss. However, it has been showed that under certain conditions the judgment proof problem can lead to overprecaution. We argue that overprecaution can never occur in magnitude models (where more precaution only reduces the magnitude of the harm) as opposed to the probability models traditionally used in the literature (where more precaution only reduces the probability of the accident). We also analyze mixed models and discuss the policy implications of our analysis.insolvency, judgment proof problem, liability, bankruptcy, overprecaution,

Soft regulators, tough judges

Judges have a tendency to be more demanding than regulators. In the United States, a majority of the courts has adopted the rule that the unexcused violation of a statutory standard is negligence per se. However, the converse does not hold: compliance with regulation does not relieve the injurer of tort liability. In most European legal systems, the outcome is similar. We use a framework in which, on the one hand, the effects of tort law are undermined by insolvency and evidence problems and, on the other hand, regulation is expensive in terms of monitoring and information gathering. We show that a regulatory standard set below the socially optimal level of care can be sufficient to remove the shortcomings of tort law. In essence, this is because the injurer’s cost function may have two local minima that make only major deviations from the socially desirable level of precaution advantageous for the injurer, but not minor violations. This may occur when precaution also or only reduces the magnitude of the harm and under liability for negligence. Thus, minimum regulation can completely restore optimal liability incentives. Conversely, liability reduces the cost of enforcing regulation in two ways: first, enforcing minimum regulation rather than a standard set at the socially optimal level is cheaper because it requires lower monitoring levels; second, tort liability already provides a part of the sanction for sub-optimal behavior, thus allowing for a further reduction in monitoring. Moreover, we show that minimum regulation does not need to be set at a very precise level. On the contrary, any level within a certain range is socially optimal. This allows regulators to further curb their cost by saving on information gathering. We show that an imperfectly working tort system can be fully corrected by minimum regulation in a variety of circumstances (for instance, even if the injurer is unable to compensate for the harm at the optimal level of precaution, and even if the rule in force is strict liability or a cause-in-fact variant of negligence)

The Rise of Carrots and the Decline of Sticks

There is a remarkable tendency in modern legal systems to increasingly use carrots. This trend is not limited to legal systems but can also be observed in, for instance, parenting styles, social control mechanisms, and even law schools\u27 teaching methods. Yet, at first glance, sticks appear to be a more efficient means of inducing people to comply with legal rules or social norms because they are not meant to be applied (thus minimizing transaction costs and risks) and may cause fewer unintended distributional distortions. So how can we justify the widespread use of carrots? This Article shows that carrots can be superior in two cases. The first is when the lawmaker faces specification problems, which means that she does not know what to expect from each individual citizen (for instance, she may not know which citizen should spend time composing songs or which part of the cargo of a sinking ship should be rescued). In those cases, sticks are likely to punish citizens who are unable to comply with the norm and likely to cause wasteful transaction costs, risks, and undesirable wealth changes. The second is when the lawmaker needs to require significantly higher efforts from some citizens than from others. We use the term singling-out danger to refer to this problem. This is the case, for instance, when the lawmaker wants only some families to send a family member to the army, or only some families to sacrifice land for a highway project. In such cases, sticks would cause significant unintended distributional distortions (artificially impoverishing those from whom much is required), making carrots superior. Overall, our results predict that in societies with more specialization and division of labor, carrots will be used more often. But they also predict that within each society, carrots will be used more often in situations that involve a higher degree of complexity. Applications include patents, regulatory takings, contract bonuses, the duty to rescue, finders, information disclosure to contract parties, the Endangered Species Act, incentives in the military, slavery, health policy, and parenting