The option value of record-based sanctions

Shmuel Leshem*, Avraham Tabbach

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)1-22
Number of pages22
JournalGames and Economic Behavior
Volume137
DOIs
StatePublished - Jan 2023

Keywords

  • Graduated sanctions
  • Option value

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