More Carrots, Fewer Sticks
One project that I’m working on (but haven’t written up yet) is about using liability rules to reward socially useful behavior. The law is replete with civil and criminal sanctions against wrongful conduct. Public policy is also enthusiastic about using property rights to encourage innovation or investment. Less attention, though, is given to what I call “rewards” for positive action.
Consider the concept of salvage in admiralty. Salvage is a liability rule that gives a vessel a claim against another vessel for a reward (determined ex post by a court) when a successful rescue is made. This is more effective than imposing an affirmative duty on vessels to help others and sanctioning them if they do not, largely because the enforcement costs of such a duty would be prohibitive. Likewise, there is no property rule that can achieve the worthy objective of preventing ships or their cargo from sinking once they are in distress. Other rewards are set ex ante by an administrative body and tailored to a particular issue. For example, the police often offer rewards for information leading to the arrest of a suspect. This is better than threatening people with accomplice liability.
Why does this matter? Part of the answer is that there are many areas of law where lack of compliance is a big problem. Tax evasion, unauthorized downloading of copyrighted material, and companies that hire illegal aliens are three examples. Sanctioning the people who violate these obligations has not worked well (assuming that people actually want these laws enforced and aren’t just grandstanding). Property rights also do nothing for these problems.
Here’s a thought experiment. Suppose the Government said that everyone who paid their income taxes in 2009 would be eligible would a lump sum lottery payout of $100 million drawn randomly. This (or some equivalent) may induce far more than $100 million in tax payments to the Treasury. In effect, this is how state lotteries work — it’s a voluntary tax or a probabilistic claim on a liability rule. Now before you get too excited, there is a problem in that such a plan would have to be accompanied by a credible amnesty for past violations, and people might well reject the scheme on that basis. The point, though, is that in some of these “lawless” situations we might want to think more creatively about carrots instead of relying on sticks that don’t work.