Carrots versus Sticks

Oxford Handbook of Law and Economics (Francesco Parisi, ed.), pp.439-465, 2017

Amsterdam Center for Law & Economics Working Paper No. 2009-13

Amsterdam Law School Legal Studies Research Paper No. 2016-37

Washington U. School of Law Working Paper No. 09-09-03

33 Pages Posted: 9 Sep 2009 Last revised: 31 May 2024

See all articles by Gerrit De Geest

Gerrit De Geest

Washington University in St. Louis - School of Law

Giuseppe Dari‐Mattiacci

University of Amsterdam; Tinbergen Institute; European Corporate Governance Institute (ECGI)

Date Written: September 8, 2009

Abstract

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

De Geest, Gerrit and Dari-Mattiacci, Giuseppe, Carrots versus Sticks (September 8, 2009). Oxford Handbook of Law and Economics (Francesco Parisi, ed.), pp.439-465, 2017, Amsterdam Center for Law & Economics Working Paper No. 2009-13, Amsterdam Law School Legal Studies Research Paper No. 2016-37, Washington U. School of Law Working Paper No. 09-09-03, Available at SSRN: https://ssrn.com/abstract=1470129 or http://dx.doi.org/10.2139/ssrn.1470129

Gerrit De Geest

Washington University in St. Louis - School of Law ( email )

Campus Box 1120
St. Louis, MO 63130
United States
314-935-7839 (Phone)

HOME PAGE: http://www,degeest.wustl..edu

Giuseppe Dari-Mattiacci (Contact Author)

University of Amsterdam ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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