Carrots, Sticks, and the Multiplication Effect

Gerrit De Geest

The Journal of Law, Economics, and Organization, 2010, vol. 26, issue 2, 365-384

Abstract: Although a punishment can be applied only once, the threat to punish can be repeated several times. This is possible because when parties comply, the punishment is not applied and can thus be used to support a new threat. We refer to this feature of sticks as the "multiplication effect." The same is not possible with promises to reward since carrots are used up every time a party complies; hence, at each round a new reward is needed. We show that the multiplication effect of sticks has pervasive consequences in economics and law and provides a unified explanation for seemingly unrelated phenomena such as comparative negligence, legal aid, the dynamics of riots and revolutions, the use of property rules, the commons problem, and the most-favored-nation clause in settlement negotiations. (JEL K14, K42) The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2010
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