For-Profit Public Enforcement
46 Pages Posted: 20 Jul 2013 Last revised: 26 Dec 2014
Date Written: February 25, 2013
This Article investigates an important yet under-theorized phenomenon: financial incentives in public enforcement. Each year, public enforcers assess billions of dollars in penalties and other financial sanctions for violations of state and federal law. Why? If the awards in question were the result of private lawsuits, the answer would be obvious. We expect that private enforcers - the victims of law violations and their fee-seeking attorneys - will attempt to maximize financial recoveries. Record recoveries come as no surprise in private class actions, for example. But dollar signs are harder to explain in the context of public enforcement. Unlike private attorneys, public enforcers are paid by salary. They have no direct financial stake in successful enforcement efforts. We assume that public enforcers pursue financial awards only for their deterrent value, not for the benefits that such recoveries can bring the enforcement agency itself.
Or do they? This Article argues, contrary to the conventional wisdom on the division between public and private enforcement, that public enforcers often seek large monetary awards for self-interested reasons divorced from the public interest in deterrence. The incentives are strongest when enforcement agencies are permitted to retain all or some of the proceeds of enforcement - an institutional arrangement that is common at the state level and beginning to crop up in federal law. Yet even when public enforcers must turn over their winnings to the general treasury, they may have reputational incentives to focus their efforts on measurable units like dollars earned. Financially motivated public enforcers are likely to behave more like private enforcers than is commonly appreciated: they will undertake more enforcement actions, focus on maximizing financial recoveries rather than securing injunctive relief, and compete with other would-be enforcers for lucrative cases. Those effects will often be undesirable, particularly in circumstances where the risk of over-enforcement is high. But financial incentives might provide a valuable spur to action for agencies that currently are performing well below optimal levels. Policymakers recognize as much when they seek to boost private enforcement by promising prevailing plaintiffs supra-compensatory damages. We show that financial incentives can serve a similar purpose in the public sphere, offering policymakers an additional tool for calibrating the level of public enforcement.
Keywords: incentives, public enforcement, financial incentives, legal institutions
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