The option value of record-based sanctions

Shmuel Leshem and Avraham Tabbach

Games and Economic Behavior, 2023, vol. 137, issue C, 1-22

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.

Keywords: Graduated sanctions; Option value (search for similar items in EconPapers)
JEL-codes: D82 G13 K42 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:137:y:2023:i:c:p:1-22

DOI: 10.1016/j.geb.2022.10.014

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