Reward Characteristics and Transaction Costs

I want to continue my discussion of rewards as a regulatory tool by focusing on: (1) the traits that rewards can have; and (2) how transaction costs affect the decision to choose rewards rather than property rights or sanctions.

One significant decision for a reward is whether it should be what I’ll call “ex ante” or “ex post.”  In other words, the state could say “We will give you a specific sum if you do something.”  Or the reward could be structured as: “If you do something, then we will give you a reward.”  The former usually involves a more specific valuation (a bounty or a subsidy), while the latter tends to be more indefinite (salvage or a medal).  Another important issue is whether the reward will be a lump sum, a percentage, or some bundle of benefits.  Once again, valuation difficulties play a significant role in this decision, as the % reflects greater uncertainty about how valuable a particular action (such as a qui tam suit) should be.

As for transaction costs, my sense is that the state chooses rewards when transaction costs are especially high.  Most people agree that liability rules are superior to property rights when the costs of bargaining are relatively high.  Multiply that problem and you get rewards.  In many reward situations, the problem is that the state cannot identify the object of the desired regulation.  For example, punishing vessels that do not rescue distressed vessels (salvage) is virtually impossible because the distressed ship and crew may be . . . er . . . unavailable to identify any wrongdoers or hard-pressed to do so even if they saw somebody who took a pass on helping them.  When it comes to a bounty, the problem is similar — many of the people that have valuable information about crimes do not want to come forward because they are fearful.  And it is hard for the state to find them.

This leads me to my final post, which is to ask where we should be using more rewards in public policy.

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