Carrots versus Sticks
Forthcoming in Oxford Handbook of Law and Economics (Francesco Parisi, ed.)
Amsterdam Law School Legal Studies Research Paper No. 2016-37
33 Pages Posted: 9 Sep 2009 Last revised: 10 Sep 2016
Date Written: September 8, 2009
This chapter, written for the forthcoming Oxford Handbook of Law and Economics (Francesco Parisi, ed.) draws a general picture of the differences between carrots and sticks. We discuss incentives effects (in principle, a $100 carrot creates the same incentives as a $100 stick, but there are exceptions), transaction costs (carrots are paid upon compliance, sticks upon violation, therefore sticks have lower transaction costs if the majority complies), risks (probabilistic carrots create risks for compliers, probabilistic sticks for violators), wealth and budget constraints (the maximum carrot depends on the principal’s wealth, the maximum stick on the agent’s wealth, but sticks can have a multiplication effect), distributive effects (carrots may overcompensate, sticks may undercompensate; individualizing sanctions changes the distributive effect of carrots but not of sticks), activity level effects caused by these distributive effects, the principal’s incentives to behave opportunistically and the agent’s incentives to self-report. We also discuss special types (precompensated, annullable, combined, intra-group financed, reversible, strict liability carrots and sticks) and two extensions (political risks, behavioral effects).
Keywords: negative sanctions, positive sanctions, reward, bonus, complexity
JEL Classification: K00, K42
Suggested Citation: Suggested Citation
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By Arthur Best