Boycott, Stigmatisation and Law Enforcement

Abstract: The theory of enforcement of law is mainly based on two different choices: strict liability and fault-based (Polinsky and Shavell, 2007). Under strict liability the fine is paid whenever an individual is guilty independently of the personal benefit obtained for committing a harmful act. Conversely, in the case of fault-based liability the conviction depends on the defined fault standard. In this paper, we study the determinants of compliance with laws when moral norms (i.e. social preferences) affect behaviour, in addition to standard material or economic incentives. In this context, the moral cost is not simply a transfer of resources. In fact, it creates an additional trade-off not present in the literature. We claim that an optimal policy cannot be detached from this consideration. We show that a non-guiltiness standard --- the fault equal to the deterrence level --- is never optimal. This is in contrast with standard arguments about the superiority of fault-based under risk neutrality. In this scenario, we show that the choice of a policy depends in a complex way on the magnitude of the harm and the moral cost.