A Generalized Model for Reputational Sanctions and the (Ir)Relevance of the Interactions between Legal and Reputational Sanctions

15 Pages Posted: 11 Mar 2016 Last revised: 13 Jul 2017

See all articles by Murat C. Mungan

Murat C. Mungan

George Mason University - Antonin Scalia Law School, Faculty

Date Written: March 9, 2016

Abstract

Reputational sanctions and stigmatization costs share many things in common. In particular, wage reductions in the labor market caused by stigmatization (Rasmusen (1996)), and profit reductions in commercial markets caused by reputational losses due to a firm's previous wrong-doings (Iacobucci (2014)) share many similarities. In this article, I construct a model in which Rasmusen (1996) and Iacobucci (2014) emerge as special cases. I use this model to show that increasing the legal sanction (or the probability of detection) cannot cause a reduction in reputational losses that off-sets the increase in expected total sanction in a stable equilibrium. This clarifies ambiguities in the previous literature, and implies that, absent further considerations, deterrence is enhanced by an increase in legal sanctions and/or the probability of detection. Thus, standard Beckerian dynamics are preserved even when reputational sanctions interact with formal sanctions.

Keywords: Stigma, Reputational Sanctions, Informal Sanctions, Extralegal Sanctions, Nonlegal Sanctions, Deterrence

Suggested Citation

Mungan, Murat C., A Generalized Model for Reputational Sanctions and the (Ir)Relevance of the Interactions between Legal and Reputational Sanctions (March 9, 2016). 46 International Review of Law and Economics 86 (2016).; FSU College of Law, Public Law Research Paper No. 793. Available at SSRN: https://ssrn.com/abstract=2745511

Murat C. Mungan (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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