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Norm Flexibility and Private Initiative

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 Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 163.

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Date of creation: 01 Sep 2006
Date of revision: 01 Nov 2006
Handle: RePEc:sef:csefwp:163
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  1. Shavell, Steven, 1993. "The Optimal Structure of Law Enforcement," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 255-87, April.
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  9. Thierry Verdier & Daron Acemoglu, 2000. "The Choice between Market Failures and Corruption," American Economic Review, American Economic Association, vol. 90(1), pages 194-211, March.
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  12. A. Mitchell Polinsky & Steven Shavell, 1999. "Corruption and Optimal Law Enforcement," NBER Working Papers 6945, National Bureau of Economic Research, Inc.
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