June 15th, 2016

Hannah Schildberg-Hörisch (University Bonn)

Abstract:

Increasing punishment is typically considered first choice to boost deterrence of unwarranted behavior such as false financial statements, asset misappropriation, stealing, or corruption. However, if there is uncertainty on a potential violator's guilt, the willingness to impose punishments may decrease in their magnitude. Increasing the magnitude of punishment may thus backfire in equilibrium, where the reduced punishment probability is anticipated by potential violators. Based on a theoretical model, our paper is the first to analyze the interdependency of violation and punishment behavior in a laboratory experiment and to contrast it to the standard partial equilibrium perspective where the punishment probability is considered to be independent of the fine size. Varying both the magnitude of fines and the degree of uncertainty confirms that, in case of legal uncertainty, the deterrent effect of higher fines is far less pronounced than in the situation where the punishment probability is exogenous.