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Norm Flexibility and Private Initiative

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  • Giovanni Immordino
  • Marco Pagano
  • Michele Polo

Abstract

We model an enforcement problem where firms can take a known and lawful action or seek a profitable innovation that may enhance or reduce welfare. The legislator sets fines calibrated to the harmfulness of unlawful actions. The range of fines defines norm flexibility. Expected sanctions guide firms’ choices among unlawful actions (marginal deterrence) and/or stunt their initiative altogether (average deterrence). With loyal enforcers, maximum norm flexibility is optimal, so as to exploit both marginal and average deterrence. With corrupt enforcers, instead, the legislator should prefer more rigid norms that prevent bribery and misreporting, at the cost of reducing marginal deterrence and stunting private initiative. The greater is potential corruption, the more rigid the optimal norms.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 314.

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Date of creation: 2006
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Handle: RePEc:igi:igierp:314

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Cited by:
  1. Giovanni Immordino & Michele Polo, 2008. "Judicial Errors, Legal Standards and Innovative Activity," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 196, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 04 Jun 2010.
  2. Leonardo Felli & Giovanni Immordino & Alessandro Riboni & Luca Anderlini, 2008. "Legal Origins and Creative Destruction," 2008 Meeting Papers 733, Society for Economic Dynamics.

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