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The option value of record-based sanctions

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  • Leshem, Shmuel
  • Tabbach, Avraham

Abstract

This paper offers an option value-based rationale for the consideration of non-compliance record in punishment. We study compliance decisions of a population of individuals who live for two periods, where each individual's non-compliance benefits are random and independent over time. Because non-uniform sanction schemes produce different option values to current-period compliance and non-compliance, an optimal sanction scheme trades off present and future compliance and depends on the overall sanction and the distribution of non-compliance benefits. Escalating sanctions maximize compliance for a small overall sanction and a large mass of high non-compliance benefits.

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  • Leshem, Shmuel & Tabbach, Avraham, 2023. "The option value of record-based sanctions," Games and Economic Behavior, Elsevier, vol. 137(C), pages 1-22.
    • Handle: RePEc:eee:gamebe:v:137:y:2023:i:c:p:1-22
    DOI: 10.1016/j.geb.2022.10.014
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    Cited by:

    1. Schmitz, Patrick W., 2023. "Incentivizing research with (un)conditional teaching duties: Punishment or rent extraction?," Economics Letters, Elsevier, vol. 224(C).

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    More about this item

    Keywords

    Graduated sanctions; Option value;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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