Formal and Social Enforcement of Individual vs. Corporate Transgressions
33 Pages Posted: 9 Jul 2015 Last revised: 10 Jul 2015
Date Written: July 9, 2015
One of the primary instruments which people use to retaliate against unfair practices is social enforcement: the decentralized action of monitoring, identifying, and reporting misconducts. Social enforcement is widely recognized as a key incentive of good practices by service providers. Technological advancement and the rise of the internet and social networks have increased the accessibility and expanded the variety of available sanctions against violators of business relationships. Whereas in the past, the primary route for applying such sanctions was the formal, state-sanction route (e.g., law suits, complaints to regulatory agencies), today, aggrieved parties are also offered a range of informal, privatized means (e.g., publicizing the transgressions, mobilizing social action and consumer action via online outlets). This new route can promote efficient enforcement and increase compliance. However, it also presents risks by weakening the accused party’s ability to defend itself, or even know the identity of the accuser in some cases.
The current research investigates people’s attitudes toward applying different means of enforcement on individual and corporate transgressors. We conducted three scenario-based experiments, which presented participants with transgressions committed by either individuals or corporations. These transgressions included maximizing ambiguities in the contractual requirements for one’s self-interest at the expense of the counterparty, exploiting one's bargaining position to make unreasonable demands, and negligent behavior. Participants assessed the likelihood they would, in response to these transgressions, take either formal action, using either legal means or regulatory institutions, or social action via the internet and social networks. The evaluated scenarios depicted purchase of land for purposes of development (Experiment 1), the purchase of an apartment from a building contractor (Experiment 2) and employer HR policies (Experiment 3).
We find that willingness to apply sanctions in response to violation of the contractual relationship depends on both the identity of the violator and the nature of the violation. First, the identity of the target of enforcement affected people’s willingness to use it: consistent with prior research, participants’ willingness to take action against a corporation depended on a clear violation of a law or a norm, whereas their willingness to take action against a person was not sensitive to this condition. Second, the type of violation had an effect on assessments of taking formal action, whereas assessments of privatized action remained relatively stable across different violations. This suggests that social and formal enforcement are not necessarily complementary in the sense that reduction in formal enforcement lead to an increase in social enforcement. We found that cases without an unambiguous violation of the law were characterized by a lower willingness to apply formal enforcement, but did not observe a change in willingness to apply social enforcement. Finally, we found that cases of negligence are met with a clear preference for formal over privatized action, regardless of the target of the sanction. However, in cases of exploiting contractual flexibility, there was a preference for formal means of enforcement against persons, but not against corporations.
The state has a number of good reasons to outsource the enforcement of norms in contractual relationships to the public and promote the use of social enforcement. However, our results demonstrate that willingness to forgo state-sponsored action in favor of such actions may, on the one hand, not be very high, and on the other hand be prone to perceptual biases of individuals and corporations.
Keywords: corporate individual, social enforcement, formal enforcement
JEL Classification: G38, C93
Suggested Citation: Suggested Citation