In my last post I explained that the state sometimes offers money or status (a reward) to regulate behavior instead of imposing sanctions or granting property rights. Now let me explain the pros and cons of this approach.
On the positive side, a reward is almost always less intrusive than sanctions. The best example is the difference between the draft (or any compulsory labor) and the volunteer military. While in that case offering inducements is the more expensive option, in many instances rewards are also a cheaper form of regulation because their enforcement costs are insignificant compared to criminal law, tort law, or property rights. When I discuss the lack of a “Good Samaritan” duty in common-law tort with my students, I point out that the high costs of imposing such a duty (both from a libertarian and a litigation standpoint) compare unfavorably to maritime salvage doctrine, which rewards rescuers rather than going after those who are indifferent. Finally, a reward is more transparent than the regulatory alternatives, both because the cost of the policy can be measured easily (and often ex ante) and because enforcement costs are low.
What are the downsides of rewards? First, they are susceptible to fraud. Any time you offer a pot of money con artists will come out of the woodwork, in part because the value of success is so clearly defined and the costs of applying are pretty low (unlike, say, in litigation). Second, the state must establish the value of the reward, and that is often very difficult. For example, few people would suggest that the state should buy inventions or books in lieu of granting a property right for them, because there would be almost no way to know how much they are worth. Finally, there are many situations in which people simply feel that a reward is inappropriate because citizens have a duty to do what the state wants them to do. We could (as I’ll point out in a subsequent post) increase tax collection through a reward system, but many would object on the grounds that people should pay their taxes even if, in practice, many don’t — not be rewarded for doing so.
In the next post, I’ll talk about some factors that shape the scope of rewards and role that transaction costs play in the decision to use them.