Copyright 2008 by Northwestern University School of Law
Northwestern University Law Review
Printed in U.S.A.
Vol. 102, No. 1
Essays
ARE ALL “LEGAL DOLLARS” CREATED EQUAL?
Yuval Feldman* & Doron Teichman**
“Whether you like it or whether you do not money is money and that is all
there is about it.”1
INTRODUCTION................................................................................................................. 1
I.
II.
BACKGROUND .......................................................................................................... 4
THE EXPERIMENT ................................................................................................... 13
A.
Participants and Design................................................................................ 13
B.
Procedure...................................................................................................... 13
C.
Results........................................................................................................... 14
III. DISCUSSION AND POLICY IMPLICATIONS ................................................................. 25
A.
Are Fines Prices?.......................................................................................... 25
B.
Choosing Between Alternative Legal Regimes.............................................. 28
C.
Limitations of the Current Study and Suggestions for Further Refinements . 31
CONCLUSION .................................................................................................................. 35
INTRODUCTION
Dollars are fungible. That is one of the basic assumptions of classic
economic theory.2 The practical meaning of this assumption is that a win of
$300 in a football bet, a $3 increase in the price of a stock for which one
owns 100 shares, or a $300 rise in the value of a pension will all affect the
*
Assistant Professor, Bar-Ilan University.
Assistant Professor, the Hebrew University of Jerusalem. For helpful comments we thank Tom
Baker, Koen Caminada, Tzili Dagan, Miri Gur-Arye, Ehud Guttel, Assaf Hamdani, Daphna LewinsohnZamir, Robert MacCoun, Barak Medina, Koby Nussim, Gideon Parchamovski, Oren Perez, Jeffrey
Rachlinski, David Weisburd, and participants at workshops at Bar-Ilan University, Hebrew University,
and the Euro-JELS conference at Humboldt University. For valuable research assistance we thank Zev
Iversen and Tami Shterenhal. Generous support for this study was provided by Marie Currie research
grant MIRG-CT 029168 and the Handler Foundation.
1
VIVIANA A. ZELIZER, THE SOCIAL MEANING OF MONEY 2 (1994) (quoting Gertude Stein, Money,
SATURDAY EVENING POST, July 13th, 1936, at 88).
2
This assumption served as the basis for modern consumption theories, according to which individuals smooth their consumption over time according to their permanent income. See generally
MILTON FRIEDMAN, A THEORY OF THE CONSUMPTION FUNCTION (1957).
**
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NORTHWESTERN UNIVERSITY LAW REVIEW
consumption behavior of an individual in an identical fashion.3 Building on
this assumption, law and economics scholars have also treated legal payments as fungible. To put things in the terminology often used by legal
economists, legal payments are the price set for an activity. Just as a dollar
paid for a tomato is identical to a dollar paid for a cucumber, so are a dollar
paid as a pollution tax to the government and a dollar paid as compensation
to the party injured by the pollution. The two simply represent the price a
polluter must pay in order to engage in the polluting activity.
Recently, Gneezy and Rustichini used an experimental setting in order
to explore whether fines actually function as prices.4 In their study they imposed a monetary fine on parents who were late picking up their child from
a daycare center.5 After the introduction of the fine, they observed a steady
increase in the number of parents coming in late.6 This result runs contrary
to traditional deterrence models that predict that increasing the cost of an
activity will necessarily decrease the rate at which it is performed. Gneezy
and Rustichini offer two explanations for their surprising results. First, the
introduction of the fine may have changed parents’ perception of the social
dynamic between themselves and the daycare center. That is to say, parents
may have viewed the fine as a price for arriving late. According to this
logic, as long as they paid the price for such behavior, parents felt comfortable being late.7 Second, the fine may have revealed information to parents
regarding the expected sanction for tardiness. Thus, parents who were previously punctual out of fear of incurring a costly sanction may have exercised less caution after learning that the actual cost of the behavior, as
revealed by the fine, was less than they had assumed it to be.8
While Gneezy and Rustichini offer some interesting insights regarding
the relationship between fines and prices, one should note that the fine imposed on parents in their study included two unique characteristics that are
not present in all legal payments. First, the imposition of the fine was certain. All of the parents knew that they would be fined every time they came
in late. In most real-world situations, however, fines are imposed probabilistically. A driver speeding on the freeway can end up paying a fine, but
can also end up paying nothing. Second, the payment of the fine was made
directly to the entity that was harmed by the wrongdoer. Fines, on the other
hand, are in many cases paid to third parties that were not directly harmed
by the regulated act. Paying an emissions tax, for example, provides the
3
See Richard H. Thaler, Anomalies: Saving, Fungibility, and Mental Accounts, 4 J. ECON. PERSP.
193, 193–94 (1990) (discussing evidence that spending of windfalls deviates from the “life-cycle spending” model).
4
Uri Gneezy and Aldo Rustichini, A Fine is a Price, 29 J. LEGAL STUD. 1 (2000).
5
Id. at 4–5.
6
Id. at 5–8.
7
Id. at 13–15.
8
Id. at 10–13.
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Are All “Legal Dollars” Created Equal?
government with income, but does not assure any compensation for the
people harmed by the pollution.
Our goal in this study is to explore how different characteristics of legal payments affect the way in which people perceive them, and, as a result,
the way they might behave in response to different legal schemes. The
three characteristics we focus on are: (a) the timing of the payment—we
distinguish between payments that are made prior to committing the harmful act and those made after the act has already been committed; (b) the
identity of the party to which the payment is made—we distinguish between
payments that are paid as compensation to the injured party and those that
are paid to a third party; and (c) whether the payment was probabilistic or
certain.
We conjecture that social norms, cognitive biases, and other forces
may cause people to behave differently under different legal rules that create similar economic consequences. More specifically, we expect that when
the legal payment is done in advance, with certainty and to the party who
was harmed by the behavior, the similarity to a price will be greater, making people more willing to engage in the harm-creating behavior if they find
it beneficial. As the legal structure shifts away from the paradigmatic structure of a price, by moving the payment after the fact, adding a probabilistic
element to it, and changing the identity of the recipient, people might be
less inclined to treat the legal payment as a price, leading them to be less
willing to engage in harm-creating behavior even if it is in their best interest
to do so.
Using a sample of 420 students, we employed a between-subject,
three-factor design. Each of the three factors was divided along two levels:
timing of payment (ex ante vs. ex post), identity of recipient (state vs. injured party), and level of certainty (certain vs. probable). Participants were
randomly divided amongst the six experimental conditions. In each experimental condition, a questionnaire was introduced with a hypothetical
scenario that involved the behavior of an owner of a factory that creates a
negative externality in its production process. Following the hypothetical,
participants were asked about their likely behavior, as well as their social,
legal and moral perceptions. Overall, we found that participants were more
likely to engage in production when they paid the individual, when they
paid in advance, and when the payment was not probabilistic.
The article is organized as follows: Part I reviews the relevant background to our study. We outline traditional economic and legal scholarship
that treats money in general, and legal payments specifically, as fungible.
We then explore studies that suggest that neither is fungible, and that similar payments could generate different behaviors. Building on these studies,
we will suggest several hypotheses to explain the differences between legal
regimes. Part II describes the design of our experiment and the results. In
Part III we further discuss these results, explore the potential policy impli3
NORTHWESTERN UNIVERSITY LAW REVIEW
cations, and deal with some of the limitations. Finally, in Part IV we briefly
conclude.
I. BACKGROUND
The law sets a menu of consequences for different types of behavior.
Take, for example, the case of a homeowner who throws a party that creates
a nuisance to his neighbors, and assume that lawmakers want to promote efficiency by enacting a law that causes the homeowner to internalize the
harm caused to his neighbors. One can imagine several legal regimes that
will achieve this goal. The law could require permits for parties, and grant
them after payment of a fee equal to the size of the externality. Alternatively, the law could prohibit parties and fine homeowners who hold them
with a fine equal to the size of the externality. Finally, the law could allow
the homeowner’s neighbors to sue and collect damages that reflect their
harms. In this study, we attempt to measure whether the choice between
different legal regimes affects the way people perceive the situation, and the
way they behave as a result.
Looking at the body of legal payments, we identify three dimensions
that differentiate them. The first is the timing of the payment: while some
payments are made prior to the act being regulated (e.g., a fee), others are
made after the fact (e.g., a fine). The second is the identity of the party receiving the payment: some legal payments are made directly to the injured
party while others are made to third parties (e.g., the state). The following
table summarizes the way in which legal payments align along the first two
dimensions we explore.
Table 1: Legal Payments—Timing of Payment and Identity of Recipient
Ex Ante
Ex Post
Third Party
Fee
Fine
Injured Party
Contract Payment
Tort Damages
A third dimension by which legal payments differ relates to the certainty of their imposition. Ex ante payments are by definition certain, and
are therefore not analyzed along this dimension. Ex post payments, on the
other hand, are either certain or probabilistic. Returning to the example of
the party, while private enforcement might be certain in that setting (note
that if the neighbors did not detect the party that would imply that no harm
was caused),9 public enforcement will sometimes fail, leading to no payment. Economic analysis has explored how discrete changes in the prob9
To be sure, perfect detection does not guarantee perfect enforcement. In the situation described
above, private enforcement might fail for a variety of other reasons. For instance, the neighbor might
decide not to sue because the costs of filing a legal suit exceed its potential payoffs.
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Are All “Legal Dollars” Created Equal?
ability of detection can be dealt with through proper adjustments of sanctions.10 We do not aim to explore the effects of such discrete changes.
Rather, our focus is on the effect of switching from a regime in which the
probability of detection is 100% to one in which it is lower (without concern about the precise probability).
For economists, the comparison between different legal regimes that
set monetary consequences to an act is straightforward. Since all dollars are
fungible, and rational individuals aim to maximize the amount of dollars
they have, economists generally assume that the legal framing of a payment
is irrelevant to the decisions individuals make. For example, the chapter in
a leading microeconomics text book dealing with negative externalities describes taxes, subsidies, and private rights as equivalent from the perspective of the individuals engaging in the regulated activity.11 From an
economic point of view, these are merely names for the price that needs to
be paid for the activity. Building on this assumption, the “seminal insight”
of law and economics was that the legal system sets prices for different acts,
and that the tools of price theory can be employed in order to predict the
way different legal rules will influence peoples’ decisions.12 Based on this
insight, legal economists modeled the incentives created by an array of legal
payments. Contract remedies were modeled as prices set by the law for
breaching a contract.13 Tort compensation was analyzed as the price set for
engaging in risky behavior.14 Similarly, criminal sanctions were modeled as
prices affecting criminals’ decision whether to commit a crime.15 Later contributions continued this line of thought and modeled the different substitution effects between legal prices.16
10
See, e.g., STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 502–09 (2004)
(discussing the possibility of an optimal balance of sanction size and probability of enforcement).
11
See ANDREU MAS-COLELL, MICHAEL D. WHINSTON & JERRY R. GREEN, MICROECONOMIC
THEORY 351–59 (1995).
12
Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality
Assumption from Law and Economics, 88 CAL. L. REV. 1051, 1054 (2000) (discussing the rational
choice model proposed by the law and economics movement).
13
See, e.g., Steven Shavell, Damage Measures for Breach of Contract, 11 BELL J. ECON. 466, 468–
69 (1980); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q. J. ECON. 121, 122
(1984) (modeling breach decisions as a function of the cost of performance and the cost set for breach
by the legal system).
14
See generally GUIDO CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC
ANALYSIS (1970); WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT
LAW (1987) (modeling the decisions of individuals as to the level of care they take as a function of the
liability they incur through the tort system).
15
See, e.g., Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169,
176–79 (1968) (presenting an analysis of the supply of criminal offenses given the probability of conviction, length of punishment, and other variables); Isaac Ehrlich, Crime, Punishment, and the Market for
Offenses, 10 J. ECON. PERSP. 43, 46–48 (1996) (offering a contemporary treatment of the subject).
16
See, e.g., Neal Kumar Katyal, Deterrence’s Difficulty, 95 MICH. L. REV. 2385 (1997) (analyzing
substitution between types of crimes); Doron Teichman, The Market for Criminal Justice: Federalism,
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NORTHWESTERN UNIVERSITY LAW REVIEW
The positive view of legal payments as prices went hand-in-hand with
the normative claim that when efficiency calls for it, breaching a legal duty
while paying the legal price is the desirable mode of action. If legal prices
are set in an efficient manner that reflects all of the harms associated with a
certain breach of duty, then breaching and paying the price implies a gain in
social welfare. In the contractual setting this claim manifests itself in the
efficient breach debate.17 Easterbrook and Fischel portray the view of legal
payments as prices more generally in the following statement:
The penalties Congress names for disobedience are a measure of how much it
wants firms to sacrifice in order to adhere to the rules; the idea of optimal
sanctions is based on the supposition that managers not only may but also
should violate the rules when it is profitable to do so.18
A corollary of the seminal insight is that different legal regimes are
merely tools in a policymaker’s toolbox, and that the choice between them
should be guided by the costs and benefits of administering them, not by an
inherent difference between them. Coase bases his endorsement of property
rights over taxation as a way to deal with negative externalities on the assumption that setting the appropriate level of taxation might be a difficult
task for the government.19 A more detailed analysis of the question was
later offered by Shavell, who explored the advantages and disadvantages of
different legal regimes aimed at controlling risk.20 Shavell divided the different regimes along two of the three dimensions we explore in this study,
namely, ex post versus ex ante regimes, and regimes initiated by private
parties vs. those controlled by the state.21 Discussing the relative advantages of ex post and ex ante regimes for different applications, Shavell deals
with questions such as: Do injurers have sufficient resources to pay for the
harm they cause? Can specific injurers be identified and assigned liability?
Which party possesses information regarding the risk and the ability to reduce it? What are the administrative costs associated with each regime?22
Similarly, Shavell’s analysis of the private-state dimension focuses on is-
Crime Control, and Jurisdictional Competition, 103 MICH. L. REV. 1831 (2005) (analyzing substitution
between geographic areas).
17
See generally Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient
Breach, 61 S. CAL. L. REV. 629 (1988); Daniel Friedmann, The Efficient Breach Fallacy, 18 J. LEGAL
STUD. 1 (1989).
18
Frank H. Easterbrook & Daniel R. Fischel, Antitrust Suits by Targets of Tender Offers, 80 MICH.
L. REV. 1155, 1177 n.57 (1982).
19
Ronald H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 41–42 (1960).
20
STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW 277–290 (1987).
21
Note that Shavell focused on the identity of the party initiating the legal procedure leading to the
payment, see id. at 278–79, while we focus on the party receiving the payment. Analytically the two do
not have to be identical, given the possibility of decoupling. Nonetheless, usually the party initiating the
legal process will also be the party receiving the payment.
22
Id. at 279–82.
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Are All “Legal Dollars” Created Equal?
sues such as the level of dispersion of harm and the parties’ information.23
Neither Coase nor Shavell explore the possibility that the legal framing itself affects the parties’ incentives, and thus could affect the selection of the
optimal legal regime.
Despite these views, some law and economics scholars have explored
the boundary of perceiving legal remedies as prices. Cooter, for instance,
distinguished between prices and sanctions based on the nature of the legal
rule.24 According to Cooter’s definition, a sanction “is a detriment imposed
for doing what is forbidden,” while a price is “payment of money which is
required in order to do what is permitted.”25 In other words, sanctions are
attached to behaviors that violate a certain standard set by the law, while
prices are attached to certain behaviors no matter how they are performed.
Thus, for example, Cooter suggests that liability within a negligence rule is
a sanction, while liability created by a strict liability rule is a price.26 Nonetheless, one should notice that Cooter’s distinction between prices and sanctions does not challenge the basic assumption that all legal payments are
fungible. According to Cooter, a sanction of $100 and a price of $100 create identical incentives.27 Rather, it is the discontinuation in legal liability
in a sanctioning system (created by the shift from no liability to total liability when one violates the legal standard) that distinguishes the incentives
created by the two systems.28
The assumption of fungible legal dollars runs against several bodies of
literature. Social scientists have documented many instances in which people do not treat their dollars as fungible. Legal scholars have argued both
that different legal payments ought to be viewed as different, and that people in fact view them as different. We turn now to review this literature and
present its implications to our study.
Sociologists have long differentiated between different types of monies. In her study, The Social Meaning of Money, Zelizer documents a wide
23
Id. at 283–84.
Robert Cooter, Prices and Sanctions, 84 COLUM. L. REV. 1523 (1984).
25
Id. at 1524–25 (emphasis omitted).
26
Id. at 1538–44.
27
This point is most evident in Cooter’s mathematical appendix, which treats both prices and sanctions as “detriment[s]” imposed by the legal system and incorporated into people’s cost function. See id.
at 1553–55.
28
To be sure, several legal scholars focusing on the behavioral effects of the law have explored the
role of differences between legal payments on parties other than the party committing the regulated act.
For example, Anderson and MacCoun demonstrated that manipulating different aspects of legal payments affects jury decisions regarding those payments. See, e.g., Michelle Chernikoff Anderson &
Robert J. MacCoun, Goal Conflict in Juror Assessments of Compensatory and Punitive Damages, 23
LAW & HUM. BEHAV. 313 319–321, 323–25 (1999). Similarly, Rachlinski and Jourden documented differences in the behavior of the parties harmed by the act as result of legal framing. See Jeffery J.
Rachlinski & Forest Jourden, Remedies and the Psychology of Ownership, 51 VAND. L. REV. 1541,
1566–72 (1998).
24
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range of situations in which people earmark monies in unique ways.29 In
early twentieth century America, money earned by women was dedicated to
specific purposes.30 Similarly, a set of social norms limited the way money
received as a gift could be used.31 For instance, gift money was not to be
used for expenses, such as groceries, or for paying a gambling debt.32
Zelizer concludes that people think and feel differently about various types
of money, which leads them to use that money in certain ways.33 While this
literature provides a theoretical foundation for our study, in the sense that it
demonstrates that people do not treat all of their dollars as fungible, it does
not provide us with specific hypotheses. Zelizer generally deals with the
way people treat money they have, not the way they treat money they must
pay. Furthermore, Zelizer does not explore the unique characteristics of legal payments as such.
Some economists have also shifted from the fungibility assumption,
documenting its violations34: Graduate students with high expected incomes
do not treat present and future dollars as fungible and tend to consume less
than the life cycle theory of consumption would suggest.35 Dollars that are
earmarked by employers as “regular” income or as a “bonus” are consumed
differently by households.36 People receiving relatively small windfalls
tend to consume them in a way that violates rational choice theory.37 Much
like the sociological literature, we find this line of literature motivating, yet
we cannot generate specific hypotheses from it. Economic studies of the
fungibility of money have also focused on money people receive and the
way they spend it; in economic terms, they have measured the marginal
propensity to consume. They have not measured non-fungibility between
different payments, let alone between different types of legal payments.
Non-fungibility of money has been documented in the crowding-out
literature as well. Generally, this literature suggests that external interven29
ZELIZER, supra note 1, at 21–25.
Id. at 61–63.
31
Id. at 111–14.
32
See id. (noting that gift money was not to be treated as regular income but rather added to one’s
capital).
33
Id. at 211.
34
E.g., Thaler, supra note 3 (documenting anomalies in fungibility). Psychologists have also explored the limits of the fungibility assumption in experimental settings. See, e.g., Hal R. Arkes et. al.,
The Psychology of Windfall Gains, 59 ORG. BEHAV. & HUM. DECISION PROCESSES 331, 332 (1994)
(suggesting that windfall gains are spent more readily than other assets).
35
See Thaler, supra note 3, at 196.
36
See Tsuneo Ishikawa & Kazuo Ueda, The Bonus Payment and Japanese Personal Savings, in
THE ECONOMIC ANALYSIS OF THE JAPANESE FIRM 133, 174–176 (Aoki Masahiko ed., 1984) (proposing
that “bonus” payments are more likely to be saved in Japan).
37
See Michael Landsberger, Windfall and Consumption: Comment, 56 AM. ECON. REV. 534, 538–
39 (1966) (speculating that windfalls are “spen[t] . . . with little thought”); see also Peter Kooreman, The
Labeling Effect of a Child Benefit System, 90 AM. ECON. REV. 571, 581–82 (2000) (discussing the potential effects of the labeling of child welfare benefits on parent’s consumption preferences).
30
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Are All “Legal Dollars” Created Equal?
tions that utilize monetary incentives or punishments may undermine (and,
under different identifiable conditions, strengthen) intrinsic motivations.38
For instance, paying people in return for their blood might erode altruistic
blood donations.39 A refinement of the crowding-out literature demonstrated that the framing of incentives affects peoples’ behavior. Fehr and
Gächter found that when monetary incentives were framed as a price reduction, they had a greater effect than when they were framed as a bonus.40
Frey and Stutzer have argued that tradable emission rights and emission
taxes could create a different crowding-out effect, bringing about different
behavior.41 This refinement of the crowding-out literature leads us to believe that the legal framing of payments could affect the way in which the
law crowds out alternative reasons for action, thereby affecting people’s
behavior.
An additional line of economic studies that offers more concrete predictions for our study examines decision-making in situations of uncertainty. This literature demonstrated that people tend to prefer certain
outcomes over probabilistic ones.42 For example, given the choice between
$3,000 for sure and $4,000 with 80% probability, people will tend to choose
the certain $3,000.43 However, when choosing between $3,000 with 25%
probability and $4,000 with 20% probability, most people choose the
$4,000 option, despite the fact that the second set of options is the same as
the first with all probabilities reduced by a factor of 4.44 The reduction of
38
See e.g., Ernst Fehr & Simon Gächter, Do Incentive Contracts Undermine Voluntary Cooperation? 1 (University of Zurich Institute for Empirical Research in Economics, Working Paper Series, Paper No. 34, 2002) (showing that a decrease in voluntary cooperation under incentive contracts is
consistent with notions of reciprocity and inequity aversion); Ernst Fehr & Armin Falk, Psychological
Foundations of Incentives, 46 EUR. ECO. REV. 687, 688 (2002) (suggesting that an overemphasis on the
importance of economic incentives actually distorts understandings of them); Ernst Fehr & Bettina
Rockenbach, Detrimental Effects of Sanctions on Human Altruism, 422 NATURE, 137, 139–40 (2003)
(suggesting that the non-reciprocal nature of sanctions deters voluntary cooperation). See generally
BRUNO S. FREY, NOT JUST FOR THE MONEY—AN ECONOMIC THEORY OF PERSONAL MOTIVATION 13–
19 (1997).
39
See RICHARD M. TITMUSS, THE GIFT RELATIONSHIP: FROM HUMAN BLOOD TO SOCIAL POLICY
245–46 (1971) (arguing that monetary payments to givers of blood could diminish the amount of blood
given voluntarily).
40
Fehr & Gachter, supra note 38, at 1.
41
Bruno S. Frey & Alois Stutzer, Environmental Morale and Motivation 14–16 (University of Zurich Institute for Empirical Research in Economics Working Paper Series, Paper No. 288, 2006). For a
literature review of economic studies discussing the effect on people’s behavior of different framing of
taxes, see Kees Goudswaard, Koen Caminada & Henk Vording, Financing the Welfare State, 42 TAX
NOTES INT’L. 731 (2006).
42
See, e.g., Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under
Risk, 47 ECONOMETRICA 263 (1979) (demonstrating this in the context of expected utility theory).
Much of Kahneman and Tversky’s analysis is built on the early contributions of Maurice Allais in Le
Comportement de l’Homme Rationnel devant le Risque: Critique des Postulats et Axiomes de l’Ecole
Americaine, 21 ECONOMETRICA 503 (1953).
43
Kahneman & Tversky, supra note 42, at 266–67.
44
Id.
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the probability of winning from 1.0 to 0.25 had a much larger effect than
the reduction from 0.8 to 0.2.45 These results imply that shifting from a
probabilistic to a certain sanction (while holding the size of the sanction
constant) might increase the level of the activity being sanctioned because
people will no longer have to deal with the uncertainty associated with the
sanction.46 This prediction runs against traditional deterrence models, according to which any increase in the probability of detection will necessarily reduce activity levels.47 The reason for this discrepancy is that
traditional theories treated the switch between a probabilistic and a certain
regime as merely another “regular” increase in the probability of detection.
Turning to the legal literature, we find several claims made regarding
different types of legal payments. The legal philosophy literature has explored in depth the inherent distinction between different types of legal
payments. To be sure, the normative nature of the philosophical claims reviewed below renders them distinct from social scientific hypotheses,
which are designed to undergo empirical assessment. Thus, one might
question the relevance of this literature to an empirical project such as ours.
Nonetheless, we find this literature relevant for two reasons. First, despite
the normative-positive dichotomy, legal philosophers build some of their
insights on “armchair” sociology and assumptions regarding human intuition. Second, even if the philosophical project is purely normative, one
would expect to observe some type of correlation between what constitutes
normatively desirable behavior and actual behavior.
Up until the 1960s, Anglo-American legal philosophy focused on the
role of sanctions in creating legal obligations. For instance, Austin viewed
law as a set of commands created by a sovereign and backed by sanctions.48
This line of thought supports the law-as-a-price-setting-device view endorsed by legal economists. Yet, later legal philosophers have presented a
competing view of the role of law within the process of reasoning. In The
Concept of Law, Hart presented what is seen as a successful critique of
Austin’s command theory of law.49 As Hart pointed out, legal rules are not
simply a set of rules backed by sanctions.50 Rather, the body of law in45
Id.
It is important to note that the behavioral literature distinguishes between perceptions of risk
(when the probability of the event is known) and perceptions of uncertainty (when the probability of the
event is unknown). In this study we focus on certain versus uncertain enforcement (where participants
are not given information on the probability of enforcement) because the theory we focus on is related to
the social meaning of enforcement rather than judgment under uncertainty. For a discussion of the difference between risk and uncertainty, see generally Amos Tversky & Craig R. Fox, Weighing Risk and
Uncertainty, 102 PSYCH. REV. 269 (1995).
47
See Becker, supra note 15, at 176–79.
48
JOHN AUSTIN, THE PROVINCE OF JURISPRUDENCE DETERMINED 18–23 (Wilfrid E. Rumble ed.,
1995).
49
H. L. A. HART, THE CONCEPT OF LAW (1961).
50
Id. at 26–41.
46
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Are All “Legal Dollars” Created Equal?
cludes an array of enabling regimes that are not built on sanctions.51 In addition, Hart emphasized the role of obligations created by law. This analysis led Hart to distinguish between taxes and fines as means to achieve
social control. As he put it,
[a] punishment for a crime, such as a fine, is not the same as a tax on a course
of conduct, though both involve directions to officials to inflict the same
money loss. What differentiates these ideas is that the first involves, as the
second does not, an offence or breach of duty in the form of a violation of a
rule set up to guide the conduct of ordinary citizens.52
Hart’s analysis captures the intuition that different types of legal payments
are inherently different because they embody a different moral meaning.
A second strand of legal scholarship relating to our study deals with
the expressive power of law. Expressive theories consist of an array of distinct claims, including theories of lawmaking, claims about the connection
between the law and social norms, and positive predictions as to the way
different legal expressions affect behavior.53 Our focus here is on the expressive theories of sanctions. Expressive theories of sanctions argue that,
as a descriptive matter, one should distinguish between penalties and punishments.54 While penalties function to a large degree as prices, punishments include a deeper social meaning that expresses resentment and
indignation.55 Thus, when legal payments are framed as punishments, the
power of the law to regulate behavior is greater. An example of the way
expressive theories of sanctions have played out in policy debates can be
found in the different views presented regarding the use of emission trading. Economists generally view emission trading as an efficient way to al51
Id. Hart suggests that enabling rules confer to people power to create a set of rights and obligations. For example, the rules of contract formation describe the conditions for the creation of an enforceable contract. Id. at 27–28.
52
Id. at 39.
53
For some prominent examples of this literature, see, for example, Dan M. Kahan, What Do Alternative Sanctions Mean?, 63 U. CHI. L. REV. 591, 595–605 (1996); Richard H. Pildes & Elizabeth S.
Anderson, Slinging Arrows at Democracy: Social Choice Theory, Value Pluralism, and Democratic
Politics, 90 COLUM. L. REV. 2121 (1990); Cass R. Sunstein, On the Expressive Function of Law, 144 U.
PA. L. REV. 2021 (1996). For a critical view, see, for example, Matthew D. Adler, Expressive Theories
of Law: A Skeptical Overview, 148 U. PA. L. REV. 1363 (2000). For empirical studies of the expressive
function of the law, see, for example, Richard H. McAdams & Janice Nadler, Testing the Focal Point
Theory of Legal Compliance: The Effect of Third Party Expression in an Experimental Hawk/Dove
Game, 2 J. EMPIRICAL LEGAL STUD. 87 (2005); Iris Bohnet & Robert Cooter, Expressive Law: Framing
or Equilibrium Selection? (Berkeley Program in Law & Economics Working Paper Series, Paper No.
31, 2001), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=452420; Yuval Feldman, The
Expressive Function of the Law: Legality, Cost, Intrinsic Motivation and Consensus (unpublished
manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=912989.
54
See, e.g., Joel Feinberg, The Expressive Function of Punishment, 49 MONIST 397 (1965), reprinted in JOEL FEINBERG, DOING AND DESERVING: ESSAYS IN THE THEORY OF RESPONSIBILITY 95–96
(1970).
55
See id. at 97–98.
11
NORTHWESTERN UNIVERSITY LAW REVIEW
locate polluting rights.56 Legal environmentalists, on the other hand, have
raised the concern that emission trading will function as a price, and lead to
a greater degradation of the environment.57
The expressive literature has yet to offer a systematic analysis of legal
payments that can explain what precisely distinguishes between penalties
and punishments. One recurring theme in this literature is that criminal
sanctions carry a powerful expressive force when compared to other forms
of sanctioning.58 In our framework, this would imply that a combination of
an ex post probabilistic payment with the state as the recipient of the payment carries a social meaning that gives it greater deterrent power than an
ex ante certain payment to the harmed party. Yet, it is not clear if it is the
combination of all of these characteristics that creates the unique social
meaning, or if each characteristic creates the meaning on its own. We conjecture that it is the first two that carry the expressive social meaning: Probabilistic payments might imply an element of wrongdoing on the part of the
paying party. One does not “get caught” or “get away” if one engages in
socially legitimate activities. It is only wrongdoers engaging in blameworthy behavior who “get caught.” Ex post payments might have a similar
meaning, because they are payments that are forced upon the actor by the
state. Ex ante payments, on the other hand, are made with consent, which
could imply that there has been no wrongdoing on behalf of the payer. Regarding the identity of the party receiving the payment, no conclusion necessarily follows. The state clearly has strong expressive powers, but those
could be used both to prohibit and to legitimize an act. Thus, we cannot assume that paying the state will always carry an identical expressive meaning. However, given that both the difference in time and difference in
probability are two qualities that differentiate fines from prices, we might
expect that this effect will be greater for payments to the state. It seems that
when the recipient of the money is the state, and when the payment is dependent upon getting caught, the payment will look like a fine rather than a
price. Similarly, paying the state in advance may foster a presumption of
legality, as though the state has licensed the behavior in question. Thus, we
expect to see some interaction among these three factors, where time and
certainty will exert a greater effect when the recipient of the payment is the
state, rather than the individual.
In sum, we have identified three structural dimensions that differentiate
legal payments: timing, recipient identity, and certainty. Reviewing the literature has led us to conclude that, even when legal payments are structured
56
See, e.g., Bruce A. Ackerman & Richard B. Stewart, Reforming Environmental Law: The Democratic Case for Market Incentives, 13 COLUM. J. ENVTL. L. 171, 179–84 (1988).
57
See, e.g., STEVEN KELMAN, WHAT PRICE INCENTIVES? ECONOMISTS AND THE ENVIRONMENT
44–47 (1981); Sunstein, supra note 53, at 2045–46.
58
See, e.g., Feinberg, supra note 53, at 98–101; Richard H. McAdams, The Origin, Development,
and Regulation of Norms, 96 MICH. L. REV. 338, 397–400 (1997).
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such that their economic consequences are similar, they might be perceived
by people as different. These differences, in turn, may yield different behavior patterns. With this background in hand, we turn to explore these differences.
II. THE EXPERIMENT
A. Participants and Design
A total of 420 students at Bar-Ilan University and the Hebrew University of Jerusalem completed the questionnaire. The participants were not
familiar with the legal issues that were described in the questionnaire. We
employed a between-subject, three-factor design. Each factor was divided
along two levels: timing of payment (ex ante vs. ex post), identity of recipient (state vs. injured party), and level of certainty (certain vs. probable).
B. Procedure
Participants were randomly divided amongst the six experimental conditions. The questionnaire was introduced with a hypothetical scenario that
involved the behavior of an owner of a factory that creates a negative externality in the production process. The text of the questionnaire, distributed
to all subjects, read as follows:59
Assume that you own a fertilizer factory located adjacent to a small lake. You
recently received an order for a specific kind of fertilizer, which the factory
has not produced previously. It will cost the factory 200,000 Shekels [around
$50,000] to produce the order. Producing this particular fertilizer also involves dumping a new kind of chemical into the lake. The only effect of
dumping this chemical into the lake will be to raise the production expenses of
a neighboring fertilizer factory, which is also located at the edge of the same
lake. With the exception of the neighboring factory, the lake water is not used
by anyone else. Additionally, the new chemical does not cause any medical
problems or damage to the environment.
The first sub-group was told that, according to the law, in order to
dump the chemical they need to pay a license fee of 100,000 Shekels
(around $25,000) to the government, ex-ante (henceforth: Ex ante-State).
The second sub-group was told that, according to the law, in order to
dump the chemical they need to pay the neighboring factory a sum of
100,000 Shekels (henceforth: Ex ante-Individual).
The third sub-group was told that, according to the law, if they dump
the chemical they are sure to be sued by the neighboring factory, and are
59
The original questionnaire was in Hebrew. For a translation of the full questionnaire, see Appen-
dix A.
13
NORTHWESTERN UNIVERSITY LAW REVIEW
expected to pay a sum of 100,000 Shekels (henceforth: Ex post-Individualcertain).
The fourth sub-group was told that, according to the law, if they dump
the chemical they might be sued by the neighboring factory, and that if they
are sued they are expected to pay a sum of 100,000 Shekels (henceforth: Ex
post-Individual-probable).60
The fifth sub-group was told that, according to the law, if they dump
the chemical they will be fined 100,000 Shekels by the municipal authority.
Participants in that group were told that, due to some state-of-the-art
equipment, detection of dumping is certain (henceforth: Ex post-Statecertain).
The sixth sub-group was told that, according to the law, if they dump
the chemical there is a good chance that they would be sued by the authorities and would have to pay a fine of 100,000 Shekels to the municipal authority (henceforth: Ex post-State-probable).
The seventh sub-group served as a control and did not undergo any
manipulation.
Following the short presentation of the vignettes, participants were
asked to estimate the sum of money they would ask for in order to produce
the chemical.61 In addition, we asked participants about the perceived ethicality of producing the chemical, whether they thought that producing the
chemical was the right move for them, whether it was legally permissible to
do so, and finally, about the likelihood that in this given situation they
would engage in producing the chemical.
C. Results
1. Differences Between “Legal Dollars.”—For convenience, we
have divided the 6 experimental groups to three sub-groups, using two of
the three dimensions: (a) the entity receiving the sum of 100,000 Israeli
Shekels, where one category relates to the State (Groups 1, 5, and 6) and the
second to the individual (Groups 2, 3, and 4); (b) the certainty and time of
payment, where one category relates to certain payment ahead of time
(Groups 1 and 2, heretofore Ex ante), a second relates to certain payment
after the fact (Groups 3 and 5, heretofore Ex post), and a third relates to uncertain payment after the fact (Groups 4 and 6, heretofore Ex post-
60
Rational individuals are expected to strictly prefer the probabilistic option. Given the fact that we
held the size of the sanction constant, according to behavioral approach, framing the fine as probabilistic
should make people less likely to dump the chemical.
61
Given that the amount of money people asked for could be dictated by a large number of factors,
and that the definition of what is a large sum of money might vary from one person to another, we supplemented this question with an explicit question of whether the participants thought they should ask for
a large sum of money in order to produce the fertilizer. For further discussion, see infra note 140 and
accompanying text.
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Are All “Legal Dollars” Created Equal?
probable).62 After this, a 2 X 3 multivariate analysis of variance
(MANOVA) was performed (payment receiving entity x certainty of payment and time).63 The dependent variables, checked simultaneously, were
the six attitude variables.64 The independent variables were the following:
(a) the entity that received the payment, and (b) the certainty of the payment
and time of that payment.65 In the MANOVA, a statistically significant66
difference was found between the averages based on the identity of the
party receiving the payment.67 Similarly, a statistically significant difference was found in the multivariate analysis of variance between the averages based on the time of payment and the certainty of payment.68 The
interaction effect of the entity that received the payment and the certainty of
the payment and time of that payment was also statistically significant.69
Table 2 presents the means and standard deviations of each of the variables, divided by the six sub-groups.70 Following the table, we describe the
findings of the series of 2 X 3 ANOVA performed for each variable separately, and the Duncan Post Hoc Tests.71
62
As a result, two new 2- or 3-level independent variables were created.
MANOVA is a common statistical technique that aims to identify the sources of variance among
participants. In our design, the purpose of the statistical analysis is to examine whether the experimental
groups are different from each other. This procedure allows us to tell how much of the difference between participants could be attributed to their assignment to different sub-groups. In plain words, this
statistical analysis will tell us how much of the difference in the responses of participants can be explained by the framing of the legal payment.
64
“Dependent variables” are variables explained by the model. In our context, the dependent variables are participants’ attitudes toward the production of the fertilizer. All six attitude variables were
measured on the same metric, 1–10 Likert scale.
65
“Independent variables” are variables that are manipulated in the model in order to measure the
effects of different values on the dependent variable. In our context, the independent variables are the
various legal regimes we described in the questionnaire.
66
“Significance” in statistics refers to the odds that a certain result was created by chance. In the
context of this paper, every time a difference or a result is presented as statistically significant, it means
that there is less than 5% likelihood that this difference was coincidental. The 5% level of significance
is a common threshold used in statistical analysis. In some cases where the result was stronger, we
added p < .01, p < .001 to imply that the likelihood of a chance driven result was lower than 1%, 0.1%
respectively.
67
F(6, 363) = 5.85, p < .001, η2 = .09.
68
F(12, 726) = 13.03, p < .001, η2 = .18.
69
F(12, 726) = 3.03, p < .001, η2 = .05.
70
“Standard Deviation” (SD) is a common concept used to measure the distribution of a variable
around the average.
71
“Post hoc tests” are used to identify the source of variance when more than one possible source
exists. For example, when an effect of a variable with three levels is significant, one needs to do a post
hoc test to identify which of the differences between the levels is responsible for the existence of a significant difference. The post hoc test we chose to use in this paper is called Duncan. It should be noted
that we also used the Scheffe post hoc test and, unless mentioned otherwise, the results were similar.
63
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NORTHWESTERN UNIVERSITY LAW REVIEW
Table 2: Means and Standard Deviations (in Parentheses) of All Measured
Dependent Variables Divided by the Identity of the Recipient, Certainty of
the Payment, and Timing of Payment
Variable
M
SD
Appropriateness M
SD
Personal Gain
M
SD
M
Perception of
Legality
SD
Compliance
M
SD
Entitlement
M
SD
Unethical
State
Ex
Ex
Ex postProbable
antepostCertain Certain
4.59
6.12
7.06
(3.11) (3.01)
(2.35)
6.10
4.53
4.78
(3.06) (2.79)
(2.79)
6.27
4.97
5.06
(3.24) (2.89)
(2.66)
3.42
8.19
8.45
(2.63) (2.42)
(2.23)
5.03
3.94
4.41
(3.27) (2.80)
(3.07)
6.60
7.71
7.97
(2.64) (2.13)
(1.70)
Individual
Ex
Ex
Ex postProbable
antepostCertain Certain
4.17
5.04
6.40
(2.58) (2.38)
(2.70)
6.54
5.79
5.39
(2.56) (2.60)
(2.84)
6.53
6.27
5.45
(2.11) (2.79)
(3.15)
3.74
5.23
6.34
(2.60) (3.08)
(3.24)
6.12
5.70
4.77
(2.54) (3.09)
(3.09)
7.02
7.14
7.85
(1.84) (1.97)
(1.81)
a. Unethicality.—The measurements of unethicality and appropriateness both focus on the perception of the morality of producing the fertilizer in a given legal payment setting. We first examined the betweengroup perceived level of unethicality of fertilizer production.72 In the analysis of variance a significant difference was found between the averages
based on the identity of the party receiving the payment.73 The average
given payment to the individual was significantly lower than the average for
payment to the state.74 That is to say, when the payment was made to the
individual, participant judgment of fertilizer production unethicality was
lower than when the payment was made to the state.
Similarly, a significant difference was found in the ANOVA between
the time of payment and the certainty of payment,75 where the average of
72
Ratings for the variable of perceived unethicality of fertilizer production (Unethical) ranged from
1 (fertilizer production in the described legal framework is not unethical) to 10 (fertilizer production in
the described legal framework is unethical). Table 2 presents the averages and standard deviations (in
parentheses) of the variable of unethicality judgment of fertilizer production according to the sumreceiving entity (state and individual), the time of payment, and amount of certainty.
73
F(1, 387) = 6.81, p < .01, η2 = .02.
74
The results of the individual were (M = 5.30, SD = 2.71), while the results of the state were
(M = 5.92, SD = 3.01).
75
F(2, 387) = 24.82, p < .001, η2 = .11.
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Are All “Legal Dollars” Created Equal?
Group 1 (ex ante-certain) was the lowest, after which comes the average of
Group 2 (ex post-certain) and the average of Group 3 (ex post-uncertain).76
In the Duncan Post Hoc Tests, significant differences were found between
the groups. That is to say, when the payment was certain and beforehand,
unethicality judgments were the lowest. Shifting payments to after-the-fact
caused a rise in unethicality judgments, and adding a dimension of uncertainty to the payment caused another rise in the perception of unethicality.77
Estimated Marginal Means of Unethicality
Estimated Marginal Means
7.5
7.0
6.5
6.0
State
5.5
Individual
5.0
4.5
4.0
1.00
1 = ex ante
2.00
2 = ex post-certain
3.00
3 = ex postprobable
Explanation for the graph (applicable to all of the following graphs). Certain payment in advance (Groups 1 and 2; heretofore, ex ante), in the legal
situation in which payment for the spillage is certain and paid in advance.
Certain payment after the fact (Groups 3 and 5; heretofore, ex postcertain), in the legal situation in which payment for the spillage is certain
and paid after the fact. Uncertain payment after the fact (Groups 4 and 6;
heretofore, ex post-probable), in the legal situation in which payment for
the spillage is uncertain and paid after the fact.
b. Appropriateness.—We next turn to examine the differences
between groups for the variable of judgment of fitting market behavior
(Appropriateness).78 In the analysis of variance, a significant difference was
76
The average of Group 1 (ex ante-certain), (M = 4.40, SD = 2.88); Group 2 (ex post-certain),
(M = 5.59, SD = 2.76); Group 3 (ex post-uncertain), (M = 6.72, SD = 2.55).
77
No significant interaction was found between the variable of unethicality judgment of fertilizer
production (spillage) and the payment recipient (state, individual) for time of payment and certainty of
payment (p > .05). That is to say, the differences that were found between the averages of the state and
the individual for the variable of unethicality judgment of fertilizer production (spillage) were not related to time or certainty of payment.
78
The range of ratings in the variable of judgment of fitting market behavior in fertilizer production
(Appropriateness) ranged from 1 (fertilizer production in the described legal situation is inappropriate
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NORTHWESTERN UNIVERSITY LAW REVIEW
found between the averages based on the variable of payment recipient79:
the average given to the state recipient was significantly lower than the average given to the individual recipient.80 That is to say, the appropriateness
of production was judged to be lower when the state, rather than the individual, was the payment recipient. Similarly, a significant difference was
found in the ANOVA between the averages based on the variable of timing
and certainty of payment81, where the average of Group 3 (ex post-probable)
was the lowest, after which came Group 2 (ex post-certain), followed by
Group 1 (ex ante-certain)82 In the post-hoc tests, the averages of Groups 2
and 3 were significantly lower83 than the average of Group 1. In other
words, shifting the payment to after-the-fact caused participants to perceive
production as a less appropriate choice.84
Estimated Marginal Means of Appropriateness
Estimated Marginal Means
7.5
7.0
6.5
6.0
State
5.5
Individual
5.0
4.5
4.0
1.00
1 = ex ante
2.00
2 = ex post-certain
3.00
3 = ex postprobable
market behavior) to 10 (fertilizer production in the described legal situation is appropriate market behavior). Table 2 presents the averages and standard deviations of the variable of judgment of fitting market
behavior in fertilizer production according to payment recipient, time of payment, and certainty of payment.
79
F(1,386) = 7.49, p < .01, 02 = η2.
80
The results of the state were (M = 5.15, SD = 2.95) while the results of the individual were
(M = 5.87, SD = 2.71).
81
F(2,386) = 7.88, p < .001 η2 = .04.
82
The average of Group 1 (ex ante certain), (M = 6.30, SD = 2.84); Group 2 (ex post certain),
(M = 5.16, SD = 2.76); Group 3 (ex post uncertain), (M = 5.09, SD = 2.82).
83
p < .05.
84
No significant interaction was found for the variables of judgment of fitting market behavior regarding fertilizer production according to payment recipient, and time, and certainty of payment
(p > .05). That is to say, the differences found between averages of the state and the individual for judgment of fitting market behavior were not related to time or certainty of payment.
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Are All “Legal Dollars” Created Equal?
c. Personal gain.—The third measure examined the differences
between groups for the variable of perceived personal gain in producing the
fertilizer (Personal Gain).85 This item prompted participants to judge the
behavior on instrumental grounds, asking whether producing the fertilizer
and paying the legal payment is a rational move. In the analysis of variance, a significant difference was found between the averages for the variable of payment recipient,86 where the average given to the state as the
recipient was significantly lower than the average given to the individual.87
That is to say, when the state was the proposed payment recipient, judgment
of personal gain from production was lower than when the individual was
the proposed payment recipient. Similarly, the ANOVA revealed a significant difference between the averages for time and certainty of payment,88
where the average of Group 3 (ex post-probable) was the lowest, the next
highest was Group 2 (ex post-certain), and the next was Group 1 (ex antecertain).89 Post-hoc tests revealed that the averages of Groups 2 and 3 were
significantly lower than the average of Group 1.90 In other words, when the
payment was ex post, whether probable or certain, fertilizer production was
judged to be less personally gainful than when the legal situation was ex
ante-certain.91
85
The range of ratings for the variable of judgment of the perceived personal gain in producing the
fertilizer (Personal Gain) ranged from 1 (fertilizer production in the described legal situation is not a
personally gainful step) and 10 (fertilizer production in the described legal situation is a personally gainful step). Table 1 presents the means and standard deviations (in parentheses) for the variable of judgment of the perceived personal gain in producing the fertilizer, as a function of the payment recipient
source, and time, and certainty of payment.
86
F(1,384) = 5.07, p < .05, η2 = .01.
87
The average of the state was (M = 5.43, SD = 2.98) and the average of the individual was
(M = 6.04, SD = 2.78).
88
F(2,384) = 5.42 p < .01, η2 = .03.
89
The average of Group 3 (ex post-probable) (M = 5.26, SD = 2.91); Group 2 (ex post-certain)
(M = 5.61, SD = 2.91); and Group 1 (ex ante-certain) (M = 6.39, SD = 2.77).
90
P < .05. The Scheffe post hoc test revealed that the average of Group 3 was significantly lower
than the average of Group 1 (p < .05) but didn’t differ from the average of Group 2 (p > .05).
91
No significant interaction was found for the variable of judgment of personal gain in producing
the fertilizer according to payment recipient, time, and certainty of payment (p > .05). That is to say, the
differences found between the averages of the state and the individual for judgment of personal gain in
producing the fertilizer were not related to time or certainty of payment.
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NORTHWESTERN UNIVERSITY LAW REVIEW
Estimated Marginal Means of Personal Gain
7.5
Estimated Marginal Means
7.0
6.5
6.0
State
5.5
Individual
5.0
4.5
4.0
1.00
1 = ex ante
2.00
2 = ex post-certain
3.00
3 = ex postprobable
d. Perception of legality.—The fourth measure examined the
differences between groups for the variable of perceived unlawfulness of
fertilizer production (Perception of Legality).92 The purpose of this measure
was to examine whether participants viewed the legal payment as legitimizing their behavior. The ANOVA revealed a significant difference between
the averages for the variable of payment recipient,93 where the average for
payment to the individual was significantly lower than average for payment
to the state.94 In other words, when the individual was presented as the
payment recipient, subjects judged production to be more lawful than when
the state was presented as the payment recipient. Similarly, the ANOVA
revealed a significant difference between the averages for timing and certainty of payment,95 where the average of Group 1 (ex ante-certain) was
lowest, after which came Group 2 (ex post-certain) and then Group 3 (ex
post-probable).96 Post-hoc tests revealed that the average of Group 1 was
significantly lower than the averages of Groups 2 and 3, which were not
significantly different. In other words, shifting the payment to after-the-fact
caused participants to perceive production as less lawful.
92
The range of ratings for the variable of judgment of perceived unlawfulness of fertilizer production (Perception of Legality) ranged from 1 (fertilizer production in the described legal situation is lawful) to 10 (fertilizer production in the described legal situation is unlawful). Table 2 presents the
averages and standard deviations (in parentheses) for the variable of judgment of perceived unlawfulness of fertilizer production as a function of the payment recipient source, time, and certainty of payment.
93
F(1,380) = 28.85, p < .001, η2 = .07.
94
The average of the individual was (M = 5.19, SD = 3.18) and the average of the state was
(M = 6.59, SD = 3.44).
95
F(2,380) = 76.62, p < .001, η2 = .29.
96
The average of Group 1 (ex ante-certain) was (M = 3.42, SD = 2.62); Group 2 (ex post-certain)
was (M = 6.77, SD = 3.12); Group 3 (ex post-probable) was (M = 7.39, SD = 2.97).
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Are All “Legal Dollars” Created Equal?
In contrast to all other measures, a significant interaction97 was found
between the variables of perceived unlawfulness of production and payment
recipient according to time and certainty of payment.98 For Group 1 (ex
ante-certain), there was no significant difference between the averages
based on the designation of the state or the individual as the payment recipient.99 However, significant differences between state and individual recipients were found for Group 2 (ex post-certain)100 and Group 3 (ex postprobable), for which the averages for the state as recipient were significantly higher than the averages for the individual as recipient. The pattern
of findings shows that the perception of lawfulness of production is higher
when the individual is the proposed payment recipient than when the state
is the proposed payment recipient. These disparities were only found when
the payment was ex post-certain or ex post-probable, but not when it was ex
ante-certain.101
Estimated Marginal Means of Perceived Legality
9.0
Estimated Marginal Means
8.0
7.0
6.0
State
5.0
Individual
4.0
3.0
2.0
1.00
1 = ex ante
2.00
2 = ex post-certain
3.00
3 = ex
post-probable
97
The meaning of an “interaction” between the recipient, time, and certainty is that the differences
found between the averages of the state and the individual for the variable of perceived unlawfulness of
production were “moderated” by the conditions of time and certainty of payment. The question of who
received the money affected the importance of timing and certainty to the perceived unlawfulness of the
production.
98
F(2,380) = 14.33, p < .001, η2 = .07.
99
F(1,380) = 1.44, p > .05, η2 = .00.
100
F(1,380) = 36.29, p < .001, η2 = .09.
101
The analysis demonstrates that there are significant differences between the averages of all three
groups for time and certainty of payment: when the payment recipient is the state, (F(2,380) = 80.68,
p < .001, η2 = .30); when the payment recipient is the individual, (F(2,380) = 14.41, p < .001, η2 = .07).
The strength of effect was more pronounced in the former.
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e. Intention to produce.—The fifth measure was related to the
differences between groups for the variable of intention to produce the fertilizer (Compliance).102 Intention to behave has been shown in many previous studies to be the best proxy for behavior,103 and hence in the context of
this study it is the closest approximation of actual behavior. The ANOVA
revealed a significant difference between the averages for the payment recipient,104 where the average for the state as the recipient was significantly
lower than the average for the individual as the recipient.105 Put differently,
when the state was the proposed payment recipient, subjects were less willing to produce the fertilizer compared to when the individual was the proposed payment recipient.
Similarly, the ANOVA revealed a significant difference between the
averages of timing and certainty of payment,106 where the average of Group
3 (ex post-probable) was the lowest, after which came Group 2 (ex postcertain) followed by Group 1 (ex ante-certain).107 The post-hoc tests revealed that the average of Group 3 was significantly lower than that of
Group 1. The average of Group 2 was not significantly different than that
of the other groups. In other words, shifting from an ex ante regime to an
ex post probabilistic regime reduced the willingness of participants to engage in production.108
102
The range of scores for the variable of compliance with fertilizer production ranged from 1
(would try not to produce the fertilizer in the described legal situation) to 10 (would try to produce the
fertilizer in the described legal situation). Table 2 displays the averages and standard deviations (in parentheses) of the variable of compliance with fertilizer production, as a function of the payment recipient
source, time, and certainty of payment.
103
See Icek Ajzen, From Intentions to Actions: A Theory of Planned Behavior, in ACTIONCONTROL: FROM COGNITION TO BEHAVIOR 11, 14–18 (Julius Kuhl & Jürgen Beckman eds., 1985) (providing a summary of empirical data suggesting a correlation between intentions and actions).
104
F(1,384) = 12.43, p < .001, η2 = .03.
105
The average of the state was (M = 4.46, SD = 3.08) and the average of the individual was
(M = 5.48, SD = 2.98).
106
F(2,384) = 3.78 p < .05, η2 = .02.
107
The average of Group 1 (ex ante certain) was (M = 5.53, SD = 3.00); Group 2 (ex post certain)
was (M = 4.81, SD = 3.07); Group 3 (ex post probable) was (M = 4.59, SD = 3.08).
108
No significant interaction was found for the variable of judgment of compliance to fertilizer production according to payment recipient, time, and certainty of payment (p > .05). That is to say, the differences found between the averages of the state and the individual for willingness to comply were not
related to time or certainty of payment.
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Estimated Marginal Means of Compliance
Estimated Marginal Means
6.5
6.0
5.5
State
5.0
Individual
4.5
4.0
3.5
1.00
1 = ex ante
2.00
2 = ex post-certain
3.00
3 = ex postprobable
f.
Entitlement.—The sixth measure examined the differences
between groups for the variable of demanding a high price for fertilizer
production (Entitlement).109 This measure attempts to capture participants’
overall dislike for engaging in the production in each legal setting. Asking
for a higher price represents their willingness to pay to not engage in this
practice. The ANOVA revealed no significant differences between the averages for the variable of payment recipient. However, the ANOVA did reveal a significant difference between the averages for the variable of time
and certainty of payment,110 where the average of Group 1 (ex ante-certain)
was the lowest, after which came Group 2 (ex post-certain), followed by
Group 3 (ex post-probable).111 The post-hoc tests revealed that the average
of Group 1 was significantly lower than the averages of Groups 2 and 3,
which were not significantly different from one another. In other words,
demand for an especially high price in return for production was lower
when the legal payment was made ex ante.112
109
The range of scores for the variable of “Entitlement” ranged from 1 (would refrain from asking
for a high price to produce the fertilizer in the described legal situation) to 10 (would ask for a high price
to produce the fertilizer in the described legal situation). Table 2 displays the averages and standard deviations of the variable of “Entitlement,” as a function of the payment recipient source, time, and certainty of payment.
110
F(2,380) = 9.44, p < .001, η2 = .05.
111
The average of Group 1 (ex ante-certain) was (M = 6.79, SD = 2.31); Group 2 (ex post-certain)
was (M = 7.42, SD = 2.06); Group 3 (ex post-probable) was (M = 7.91, SD = 1.75).
112
No significant interaction was found for the variable of Entitlement, according to payment recipient, time, and certainty of payment (p > .05). That is to say, the differences found between averages
of the state and the individual for demand of an especially high payment to produce the fertilizer were
not related to time or certainty of payment.
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Estimated Marginal Means of Entitlement
Estimated Marginal Means
8.2
8.0
7.8
7.6
State
7.4
7.2
Individual
7.0
6.8
6.6
6.4
1.00
1 = ex ante
2.00
2 = ex post-certain
3.00
3 = ex
post-probable
2. Summary of the Results.—In contrast to rational choice theory
predictions, we found that the structure of legal payments is important. The
identity of the party receiving the payment, the timing of it, and the certainty with which it is assessed were all found to be related to most measured variables.
a. Identity of recipient.—In all 6 measures, participants preferred a situation in which the payment was made to an individual rather
than to the state. Overall, people perceived this setting to be more moral,
and production in it to be more socially and legally acceptable. Perhaps
most importantly, participants were more likely to produce the fertilizer in
this situation. However, the difference between the situations was not significant regarding the price participants would ask for producing the fertilizer.
b. Timing of payment.—A strong and significant difference existed between paying ex ante and paying ex post, regardless of whether the
payment was probable or certain. Participants thought it was more moral,
and more socially and legally acceptable, to produce the fertilizer when they
made the payment ex ante. Furthermore, participants required a smaller
profit for production in the ex ante situation compared with the ex post
situation.113
c. Certainty of payment.—In all six measures, participants demonstrated a dislike for probabilistic payments. However, in five of the six
measures the ex post probabilistic group was significantly different only in
113
The only exception was when the dependent variable was “Intention”; in that case the ex ante
group differed significantly only from the third group of ex post-probable.
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comparison to the ex ante group, not in comparison to the ex post certain
group. The comparison to the ex ante group could not be attributed to the
effect of certainty alone, as the timing of payment is different too. Hence,
only a comparison between the ex post certain and ex post uncertain groups
could measure the effect of uncertainty, but this comparison was not significant in five of the six measures. However, with regard to the measure of
intention, ex post probabilistic participants differed significantly from the
ex post-certain group, implying that when the payment was not certain they
were less likely to produce the fertilizer when compared with the situation
where the payment was certain.
d. Interaction between identity of the recipient and timing of the
payment.—A significant interaction emerged regarding the perception of legality. There was a difference between ex post and ex ante when the state
was the recipient. However, when the individual was the recipient, there
was no such difference. This pattern was also evident in some of the other
measures (e.g. entitlement), but only with a marginally significant interaction. Thus, we found some evidence that the importance of timing was
stronger when the recipient was the state.
III. DISCUSSION AND POLICY IMPLICATIONS
In this Part, we turn to explore the implications of our findings for legal policy-making. First, we tie the findings of Part II to the theoretical literature reviewed in Part I. We then suggest several policy implications
resulting from these findings. Due to the preliminary nature of this study,
these suggestions are tentative rather than definitive. Finally, we point out
the limitations of our study, and outline future research that could help
overcome some of these limitations.
A. Are Fines Prices?
In this article, we documented consistent and robust differences between legal payments based on their structures. This result runs against traditional economic theory, which assumes that all legal payments are
fungible. Thus, our findings suggest that the “fines are prices” paradigm
should be revisited, and refined along the three dimensions we studied.
First, much like in other settings, people like certainty and dislike uncertainty with respect to legal payments.114 Our study demonstrated that
114
See Shawn P. Curley, J. Frank Yates & Richard A. Abrams, Psychological Sources of Ambiguity
Avoidance, 38 ORG. BEHAV. & HUM. DECISION PROCESSES 230, 230–31 (1986) (surveying research on
ambiguity avoidance and seeking to explain it); Hillel J. Einhorn & Robin M. Hogarth, Ambiguity and
Uncertainty in Probabilistic Inference, 92 PSYCH. REV. 433 (1985) (developing a quantitative model
accounting for the role of ambiguity in inferential judgments); Craig R. Fox & Martin Weber, Ambiguity
Aversion, Comparative Ignorance, and Decision Context, 88 ORG. BEHAV. & HUM. DECISION
PROCESSES 476, 478 (2002) (discussing how relative degrees of ambiguity can affect decisionmaking).
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people perceived probabilistic payments as an indicator that the sanctioned
behavior is less moral and less acceptable than activities subject to certain
payments. Furthermore, participants were less willing to engage in a harmful activity when a probabilistic element was added to otherwise equal legal
payments. This result confirms our hypothesis and that of others writing on
the deterrent effect of ambiguity.115 Although this effect was consistent
across all measures, it was not significant in all of them. The lack of significance across all measures might be explained by the fact that rational
individuals are expected to strictly prefer the probabilistic option, given the
fact that we held the size of the sanction constant. Thus, our finding in this
measure could be interpreted as particularly powerful. Finally, we note that
our findings do not allow us to decipher what is driving them, since cognitive biases associated with both uncertainty aversion and the expressive
meaning of probabilistic sanctions might be in place.
Second, our findings demonstrate the significance of the timing of
payment. In accordance with our predictions, paying before the harmful act
rather than after it reduced the negative perception of the payment and increased the willingness of people to engage in harmful activity. This result
follows the connection we drew between the paradigmatic structure of a
price versus a legal payment. In the private setting, ex ante payments could
imply consent that was granted in return for the legal payment, thereby justifying the act. Ex post payments to individuals, on the other hand, do not
imply consent, and therefore sustain the perception of the act as forbidden.
In the context of the state, ex ante payments give salience to the unique role
of the state as a legitimate source of authority. Numerous studies of social
psychology have documented the unique power of the state in securing
obedience.116 This power has been tested even in extreme cases such as torture.117 Thus, paying the state in advance and getting a license from it might
be especially appealing to participants. Ex post payments to the state, however, employ the ability of state sanctions to shape people’s moral reasoning and perception of wrongdoing. When such a payment is given to the
state, it brings some greater moral opprobrium and social labeling against
engaging in that behavior, increasing the impact of the payment above the
115
See, e.g., Alon Harel & Uzi Segal, Criminal Law and Behavioral Law and Economics: Observations on The Neglected Role Of Uncertainty In Deterring Crime, 1 AM. L. & ECON. REV. 276, 277
(1999) (suggesting that ambiguity of enforcement increases deterrence); Uzi Segal & Alex Stein, Ambiguity Aversion and the Criminal Process, 81 NOTRE DAME L. REV. 1495, 1497 (2006) (discussing how
ambiguity aversion creates power imbalances between the prosecution and defendants).
116
See generally HERBERT C. KELMAN & LEE HAMILTON, CRIMES OF OBEDIENCE: TOWARD A
SOCIAL PSYCHOLOGY OF AUTHORITY AND RESPONSIBILITY (1989) (describing the psychology of authority and obedience in the context of historical events such as the military-ordered killings in My Lai,
Vietnam).
117
See Herbert C. Kelman, The Social Context of Torture: Policy, Process, and Authority Structure,
in THE POLITICS OF PAIN: TORTURERS AND THEIR MASTERS 19 (Ronald D. Crelinsten & Alex P.
Schmid eds., 1995) (discussing the sources of the power of the state to give people (in our terminology)
a moral license to harm others).
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Are All “Legal Dollars” Created Equal?
cost of the sanction.118 This dimension of state-based sanctions was confirmed in various empirical studies that focused on the moral effect of formal sanctions.119
Third, in accordance with our predictions, people were more willing to
engage in harmful behavior when the individual harmed by the act, rather
than a third party, received the payment. This result suggests that the framing of a payment as compensation connotes a different social meaning.
Compensation brings the parties closer to the paradigmatic price, especially
in cases where the losses suffered by the injured party are purely monetary.
It removes (to a certain degree) the harm caused to the injured party from
the decisionmaking calculus, thus allowing individuals to consider their
personal benefit without the moral burden of having injured another.
Finally, the interaction between the identity of recipient and the time
and certainty of payment provides additional support for the fine-as-a-price
paradigm.120 A post hoc analysis that followed the interaction demonstrated
that when the state was the recipient, the timing had a greater effect on the
attitudes of the participants in comparison to when the individual was the
recipient. Because many paradigmatic prices are paid in advance (e.g., the
classic spot-market transaction), while fines are usually paid after the fact, it
was expected that people would be more willing to engage in production
when the payment was done in advance. However, because it is easier to
view the payment as a fine when the state is the recipient of the payment,
the effect of timing is likely to be stronger in those scenarios than when the
individual is the recipient. Furthermore, when the state is the recipient of
the payment, shifting the timing to ex ante is of greater significance because
it transforms the situation into one in which the individual acts in complete
compliance with the law. Hence, the timing of the payment should receive
greater attention from policymakers when the recipient of the payment is
the state.
To sum up, there appears to be a continuum of legal payments. These
payments are perceived differently by people, and as a result generate distinct incentives. At one end of this continuum lie legal payments that are
118
See Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349,
352–61 (1997) (discussing the impact criminal convictions can have on perceptions of social status).
119
See, e.g., Raymond Paternoster & Sally Simpson, Sanction Threats and Appeals to Morality:
Testing a Rational Choice Model of Corporate Crime, 30 LAW & SOC. REV. 549 (1996) (showing that
the greater the perceived sanction, the greater the perceived moral wrongdoing associated with the sanctioned behavior); Kirk R Williams & Richard Hawkins, Perceptual Research on General Deterrence: A
Critical Review, 20 LAW & SOC. REV 545 (1986) (distinguishing between mere deterrence (formal cost),
normative validation (internalization) and social deterrence (social cost)); Frank Zimring & Gordon
Hawkins, The Legal Threat as an Instrument of Social Change, 27 J. SOC. ISSUES 33 (1971) (examining
how punishment traditionally associated with price might teach right and wrong).
120
Though the interaction between the identity of the recipient and the timing of the payment was
significant only in one measure (perceived unlawfulness), it was evident, albeit in weaker forms, in
some of the other measures as well.
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similar in structure to a paradigmatic price. These are payments made to
another private party in advance. At the other end of the continuum lie legal payments that are similar in structure to a paradigmatic punishment.
These are payments made after-the-fact to the state, and assessed probabilistically. As legal payments shift from the price side to the punishment side
of the continuum, people begin to see the payment-triggering activity as
less moral, and as a result they are less willing to engage in it.
B. Choosing Between Alternative Legal Regimes
So law does matter. Legal payments are not mere prices, and the
choice between them may affect behavior. Given that, we turn to review
some of the implications of our findings for the design of optimal legal
rules. At the outset we would like to emphasize that due to the preliminary
nature of our project, our suggestions should not be read as definitive calls
for swift legal reform. Rather, we point out several policy debates that
should be revisited both theoretically and empirically in light of our findings.
The general implication of our work is that when policymakers choose
between legal regimes, they not only set monetary consequences for different types of behavior, but also determine how people will perceive those
consequences. While some legal payments are perceived as prices and
therefore encourage people to conduct cost-benefit analyses, others exclude
such considerations from people’s decisions. Thus, the choice between different modes of payment should focus on whether policymakers want to encourage non-compliance when the benefit derived from the activity is larger
than the legal payment assessed. If policymakers aim to promote efficiency, and can set legal payments such that they capture the full social
harm caused by the activity, there is a clear advantage in framing legal
payments as prices. In these cases, our analysis supports ex ante payments
made directly to the parties who will be harmed by the act. These payments
would crowd out people’s intrinsic motivation not to harm others, and cause
them to engage in the harm-generating behavior, provided it is beneficial
for them to do so. If, on the other hand, policymakers aim to reduce the
harmful activity notwithstanding its efficiency, they should consider framing the payment to be as different from a price as possible: making the payment probabilistic, assessing it after the harmful activity, and directing it to
the state. Such framing could create additional deterrence without increasing the size of the payment. This could be especially useful when political
forces limit the ability to raise sanctions or when harm-doers have limited
resources.
Pollution is a classic example of a harmful activity that we want people
to engage in if the benefits arising from it outweigh its harms.121 Policy121
We do not wish to defend the strong utilitarian claim that any harm to the environment that creates greater benefit is justified. All we claim is that some type of cost-benefit analysis in the environ-
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makers tend to recognize that command-and-control regulation might create
inefficiencies that environmental taxes can prevent.122 Our findings confirm
this assertion, and they demonstrate that pollution taxes could encourage
people to conduct cost-benefit analyses.123 Furthermore, our results could
inform the optimal design of a pollution tax to increase the likelihood that
people view it as a price. For example, ensuring that people realize the tax
compensates the individuals harmed by pollution will increase the likelihood that they view the tax as a price. Indeed, several scholars have attacked some of the underlying rationales of pollution taxes, suggesting that
the taxes should be used to compensate those who are harmed by pollution,124 yet these scholars have focused on the distributive arguments rather
than on behavioral analysis. Similarly, the certainty of detection is important to prevent an association with fines. Employing new technological
tools that assure complete detection will cause polluters to perceive the
taxes they pay as mere prices.
The results offer an additional perspective to the current debate regarding the behavioral effects of environmental regulation. Some have argued
that the effect of taxation on behavior is contingent upon the size of the
tax.125 Large or small taxes would reduce pollution, while intermediate
taxation would crowd out intrinsic motivation without suggesting a costly
enough incentive to abstain from polluting. In that regard, scholar Bruno
Frey calls for the use of other means of regulation with less of a crowding
out effect.126 Others have argued that Frey’s predictions are uninformative
since they fail to account for numerous factors related to the framing of the
payments (e.g., tax versus subsidy).127 Based on the findings accumulated
mental context is essential. For a discussion, see generally CASS R. SUNSTEIN, FREE MARKETS AND
SOCIAL JUSTICE 193–200 (1997).
122
See, e.g., MIKAEL S. ANDERSEN, GOVERNANCE BY GREEN TAXES: MAKING POLLUTION
PREVENTION PAY 24–25 (1992); see also Britt Groosman, Pollution Tax, in II ENCYCLOPEDIA OF LAW
& ECONOMICS: CIVIL LAW & ECONOMICS 538, 538 (Boudewijn Bouckaert & Gerrit De Geest eds.,
2000). For econometric evidence on its impact, see Robert W. Hahn, The Impact of Economics on Environmental Policy, 39 J. ENVTL. ECO. & MGMT. 375 (2000); Robert N. Stavins, Experience with MarketBased Environmental, Policy Instruments (Kennedy School of Government Working Paper No. 00-004,
2001), available at http://papers.ssrn.com/abstract_id=199848.
123
For support of the argument that environmental taxation would crowd out internal social norms
of environmental protection by polluting factories, see Ching-Chong Lai, Chih-Yu Yang & Juin-Jen
Chang, Environmental Regulations and Social Norms, 10 INT’L TAX & PUB. FIN. 63, 64 (2003) (arguing
that social sanctions can effectively deter pollution in the absence of high fines).
124
E.g., Groosman, supra note 121, at 539–56 (arguing that the “raison d’être” of emissions taxes
are externalities and compensation).
125
See, e.g., Bruno S. Frey & Alois Stutzer, Environmental Morale and Motivation 14–16 (Institute
for Empirical Research in Economics, University of Zurich Working Paper Series, Paper No. 288,
2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=900370 (suggesting that the size
of the crowding out effect is directly linked to the size of the environmental tax rates).
126
Id. at 18–20.
127
E.g., Karine Nyborg, Informational Aspect of Environment Policy Deserves More Attention:
Comment on the Paper by Frey, 22 J. CONSUMER POL’Y 419 (1999).
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in this paper, it is safe to say that Frey’s perspective is indeed unsatisfactory, as it focuses on the size of the payment as the sole factor that would
moderate the level of crowding out. Frey’s model ignores the importance
of factors such as certainty, timing, and the identity of the recipient. There
is a limit to the magnitude of payment a state can realistically request from
individuals, thus, the different ways of framing the payment could be an effective policy tool.128
Turning to the issue of uncertainty, the findings reported in this study
suggest a conclusion that runs against the conventional wisdom of enforcement. The comparison between the probabilistic groups and the certain
groups showed that raising the probability of detection to one hundred percent while holding the size of the sanction constant could cause more people to behave in a harmful manner. Thus, contrary to the prediction of
rational choice theory that any increase in the probability of detection will
also increase deterrence, our results suggest that an increase to a one hundred percent probability of detection might actually reduce deterrence because it will change the social meaning of the sanction. Take, for instance,
the issue of the enforcement of traffic laws. Current technology allows
regulators to detect some violations of these laws with complete certainty
using a combination of “black boxes” and GPS.129 Rental companies have
already used this technology in order to fine customers who drove their cars
above the speed limit.130 While traditional analysis would suggest that utilizing such technology will necessarily increase compliance (or allow for a
reduction of the level of sanctions), our analysis suggests that shifting to a
regime in which sanctions are one hundred percent certain might cause
people to be more willing to engage in cost-benefit analyses, bringing about
lower compliance overall.131 In such situations, the magnitude of the payment must be increased to sustain a given level of deterrence.
128
For example, Shavell describes the limits of the legal system to deter companies from taking
risks which exceeds their assets. Given that these companies cannot pay for the losses they might cause,
they become, in Shavell’s terminology, “judgment proof.” In such a situation, the importance of the dimensions we explored in this paper become even more important, because they would make it possible
to create sufficient deterrence in cases where other factors might prevent a net increase in the magnitude
of the fine. See SHAVELL, supra note 10, at 230–31.
129
See Aaron Renenger, Satellite Tracking and the Right to Privacy, 53 HASTINGS L.J. 549, 553–54
(2002) (describing how GPS technology can be used to monitor the behavior of both cars and children).
130
Id.
131
This will depend on how people perceive the probability of detection prior to the use of the new
technology. If detection was previously perceived to be low, then the increase in the probability of detection could outweigh the certainty effect. In this regard our results suggest that more compliance can
be achieved by raising the probability of detection to a level that is below the 100% threshold, which
will allow policymakers to preserve the deterrence power of uncertainty.
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C. Limitations of the Current Study and Suggestions for Further
Refinements
In this final Subsection, we evaluate the potential criticisms to this project. We outline the limitations of our results and sketch out additional research that could help deal with these limitations, thus deepening our
understanding of legal payments.
The first limitation of our results is the high standard deviation measured for participants’ estimations of their price requests (in return for their
agreement to produce the fertilizer). Therefore, this measure did not yield
significant differences between the sub-groups of the sample. This large
variation might be related to the difficulties the participants faced when
they attempted to estimate a price with such limited information. Future research could attempt to deal with this problem by giving participants more
detailed information about the circumstances of the case. Such additional
information could improve the ability of participants to give more accurate
estimates of the price they would demand in such circumstances.132
A second limitation might be seen in the strong feelings of social desirability that may have been evoked by the selected experimental scenario.
Indeed, participants in our study were explicitly requested to account for
and describe their willingness to profit at the expense of others. This fact
might have a greater effect on answers regarding the identity of the recipient because people might feel that it would look better if they were willing
to produce the fertilizer only when they compensate the damaged party.
With regard to the timing of the payment and the probability of detection,
the social desirability effect might still exist, but is expected to be weaker,
as choices are more equal in their perceived desirability.
A third limitation of our study might stem from the way in which we
chose to describe the harm caused. Our experimental setting was a unique
case where a clear victim existed, both when the payment was made to the
state and when the payment was made to the individual. In many realworld cases, however, there is no identifiable victim, and one can only identify a group of people, e.g., the people living in the village next to the factory, of whom some were harmed by the act. In these contexts, locating an
individual victim and making a direct payment to her might make people
more resistant to view the payment as a legitimate price.
Along those lines, our findings should not be generalized to situations
in which the harm cannot be quantified or fully compensated. Legal scholars have long since distinguished between harms that are commensurable
and those that are not.133 Unlike the utilitarian claim that decisions can be
132
Nonetheless, as explained earlier, we used a Likert scale to measure participants’ estimations of
the magnitude of the sum they would request (Entitlement); this measure was intended to capture the
same behavioral estimate.
133
For important contributions to the philosophical literature on incommensurability, see
ELIZABETH ANDERSON, VALUE IN ETHICS AND ECONOMICS 55–59 (1993) (exploring the notion of non-
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aligned along a utility metric, and the economic assumption that decisions
can be evaluated through a monetary metric, the incommensurability view
holds that some types of decisions do not reflect a preference of one value
over the other. Incommensurability suggests that compensatory damages,
for example, do not function as a price.134 Rather, they are intended to acknowledge wrongdoing on the part of the wrongdoer, and to bring redress
to victims by showing that their rights are taken seriously.135 Thus, in situations involving bodily harms it is quite possible that the way people perceive the situation will differ substantially from the perceptions reported in
our study. While, as we argue above, in such cases we might want to prevent a transformation from fines to prices, it is essential to explore experimentally the perception of people in such settings, and examine whether the
pattern we presented in this study is replicated.
A fourth limitation results from the fact that participants were asked to
make a business-like decision in which one business entity harms another.
One should not generalize from the selected business-like setting to all
types of disputes, since our setting may have signaled to participants a need
to employ a calculative approach, rather than a moral or emotional one.
Arguably, in more private settings (e.g., a neighbor dispute), people might
tend to employ different perspectives when evaluating legal payments. For
instance, Baker documented substantial differences between the way tort
victims treat money they receive from liability insurance companies versus
money they receive directly from tortfeasors.136 With respect to the former,
victims clearly aim to maximize the amount of payments they receive.137
With respect to the latter, however, social norms labeling this money as
“blood money” limit (actually, almost eliminate) its value, causing victims
not to pursue compensation from “real people.”138 Hence, future research
should examine whether changing the setting impacts the pattern, as it did
in this case.
A fifth limitation was caused by the fact that all payments made to a
third party in our study were made to the state. Payments to the state create
two effects, which are hard to separate in a single comparison: (a) the victim is not being compensated, and (b) the expressive power of the state is at
fungible incommensurable goods); JOSEPH RAZ, THE MORALITY OF FREEDOM 321–66 (1986) (reconciling incommensurability with other liability concepts). For a discussion of the later legal implications of
the concept, see generally Cass R. Sunstein, Incommensurability and Valuation in Law, 92 MICH. L.
REV. 779 (1994); MARGARET JANE RADIN, CONTESTED COMMODITIES (1996).
134
See Margaret Jane Radin, Compensation and Commensurability, 43 DUKE L.J. 56, 56 (1993)
(addressing the debate over whether non-pecuniary harms, like the loss of a limb, can be commodified);
Sunstein, supra note 133, at 840–43.
135
Radin, supra note 134, at 61.
136
Tom Baker, Blood Money, New Money, and the Moral Economy of Tort Law in Action, 35 LAW
& SOC. REV. 275, 276 (2001).
137
See id. at 281–301.
138
See id.
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work. Situations in which the third party collecting the payment is not the
state, e.g., a trade association, might bring about different results. For example, Baker documented differences between the way people treat money
paid to insurance companies and money paid to victims of tortious acts.139
In that sense, paying an insurance company creates an ideal intermediate
category, where the individual is not getting paid, but the state’s expressive
power is not being triggered either. Future research should test all three
scenarios on one subject, allowing for greater isolation of each of the effects
that are unique to the individual and the state.
Additionally, our questionnaire did not attempt to control for the size
of the payment. Much of the crowding-out literature has argued that the
magnitude of this effect could depend on the size of the monetary incentives
being used. Frey, for example, has argued that there is a U-shaped connection between the size of the incentive and the crowding-out of intrinsic motivation, such that crowding-out is strongest with intermediate payments.140
Thus, controlling for the size of the payment is expected affect the tendency
of people to view the payment as a price, and their willingness to engage in
harm-generating behavior.
Finally, one should recognize the general limitations of the methodology we employed. Measured items were basically attitudinal scales. Given
the extensive literature on the complexity of the attitude-behavior relationship,141 one ought not over-state these findings. Future research should attempt to combine other methodological approaches with additional types
for proxies of behavior.142 That said, it should also be recognized that numerous studies have documented the validity of using intention as a proxy
for behavior.143 Thus, we expect that the current pattern of findings would
be replicated using other methodologies.
A separate set of questions that we leave for future research relates to
how the legal framing of payments affects the behavior of the recipients.
Our study was motivated by the view of legal payments as prices, and
therefore focused exclusively on the payer’s side of the legal equation.
However, distinct legal payments could have different meaning for the recipient’s side as well. For example, aiding the poor through the tax system
or through private law could create different motivations on the side of the
receiving party, even if they receive identical sums of money. The traditional economic approach to the question of which type of redistributive
tool is superior is that the tax-and-transfer system is the most efficient way
139
Id. at 301–13 (discussing the concept of “new money”).
Frey & Stutzer, supra note 125, at 16; see also Uri Gneezy & Aldo Rustichini, Pay Enough or
Don’t Pay at All, 115 Q. J. ECON. 791, 800–07 (2000) (evaluating the empirical evidence for this effect).
141
See, e.g., Yuval Feldman, Attitudes and Behavior, in ENCYCLOPEDIA OF LAW & SOCIETY:
AMERICAN AND GLOBAL PERSPECTIVES 102 (2007).
142
As in game based settings.
143
E.g., Ajzen, supra note 103, at 14–18.
140
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NORTHWESTERN UNIVERSITY LAW REVIEW
to redistribute wealth, since income taxes only create inefficiencies associated with distorted work incentives, while redistributive private-law rules
create the same distortions regarding work, and additional distortions with
respect to the activity that they regulate.144 Recently, Lewinsohn-Zamir argued that once the fungibility assumption is relaxed and we acknowledge
that there could be differences between dollars received from the tax-andtransfer system and those received through private law, the use of private
law in order to redistribute wealth could be justified from a consequentialist
perspective.145 Nonetheless, this theoretical conclusion was based on behavioral studies that did not explore the unique nuances of legal payments.
A complete theory of efficient redistribution should follow along the lines
we set in this study and explore the differences between different types of
redistributive legal payments.
Our results also suggest an array of potential studies in the area of optimal contract design. For instance, our findings offer an additional perspective on the choice made by contracting parties between liquidating
damages in the contract and relying on courts to determine them after the
breach has occurred. While we do not disagree with the existing literature
outlining the different considerations relevant to this choice,146 we find it incomplete in the sense that it treats liquidated damages and court-determined
damages as fungible. Our analysis suggests, however, that liquidated damages might be perceived differently by the potential breaching party. The
fact that liquidated damages are set ex ante might cause potential breachers
to view them as a payment that is closer to a price.147 Thus, all things being
equal, contracting parties are expected to be more willing to breach and pay
damages when damages are set prior to the breach.
Given the price nexus between contracting parties, a contract design
that promotes additional breaches is desirable from their perspective because it could help promote efficient breaches during the performance of a
contract. As long as damages are liquidated such that they reflect the full
cost of the breach, all breaches enlarge the size of the contractual pie. A
good example of this is the fine imposed in the daycare center that Gneezy
144
See, e.g., Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. Legal Stud. 667, 668 (1994).
145
Daphna Lewinsohn-Zamir, In Defense of Redistribution Through Private Law, 91 MINN. L.
REV. 326, 362–72 (2006).
146
See, e.g., Philippe Aghion & Benjamin Hermalin, Legal Restrictions on Private Contracts Can
Enhance Efficiency, 6 J. L. ECON. & ORG. 381 (1990); Charles J. Goetz & Robert E. Scott, Liquidated
Damages Penalties, and the Just Compensation Principle: Some Notes on an Enforcement Model and a
Theory of Efficient Breach, 77 COLUM. L. REV. 554 (1977); Alan Schwartz, The Myth that Promisees
Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 YALE L.J.
369 (1990).
147
To be sure, the case of liquidated damages is distinct from our experimental setting in the sense
that both liquidated damages and court-determined damages are paid after the breach. Hence, one
should view the liquidated damages situation as a unique hybrid case in which the payment is assessed
ex ante but actually paid ex post.
34
102:#### (2008)
Are All “Legal Dollars” Created Equal?
and Rustichini studied.148 Arguably, in such a setting, one can easily calculate the harm caused by parents coming in late, which mostly consists of the
value of the time of the employees who are required to stay late. The introduction of the fine could assist the daycare center and the parents in reaching an efficient outcome by capturing the surplus between the value of the
time of late parents and the value of the time of the daycare center’s employees.
CONCLUSION
We began this study with a question: Are all “legal dollars” created
equal? And we end it with an answer: No, they are not. We identified three
structural characteristics of legal payments that create consistent differences
between them: the identity of the party receiving the payment, the timing in
which it is made, and the certainty with which it is assessed. The shift between the different payments gradually transforms prices into punishments,
and changes the way people treat legal payments. This result runs against
the fundamental assumption of economic analysis of law: that all legal
payments are fungible. We then demonstrated that relaxing this assumption
suggests that an array of policy debates, ranging from environmental regulation to law enforcement, should be revisited in order to fully understand
the effects of legal regimes that seem to be equivalent from an economic
perspective.
While the results we present are robust, in the sense that they demonstrate differences between legal payments, one should note that this study
has explored a point not studied empirically before, and that there is much
more work to be done before we fully understand the differences we documented. Thus, we cannot offer at this point a comprehensive theory explaining the differences between all legal payments in every conceivable
context. In order to progress towards development of such a theory, we offered several suggestions for future research that could help broaden our
understanding of the distinctions between legal payments. Undoubtedly,
deciphering the social meaning of legal dollars is a tricky task. If one intends to utilize law in an optimal fashion, however, it is an essential task.
148
See supra notes 4–8 and accompanying text.
35
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APPENDIX A: METHODOLOGY
QUESTIONNAIRE
ATTITUDE SURVEY: The following survey is designed to test your attitudes
regarding legislation on dumping chemicals into Israeli lakes.
GENERIC SCENARIO: Assume that you own a fertilizer factory located adjacent to a small lake. You recently received an order for a specific kind of
fertilizer, which the factory has not previously produced. It will cost the
factory 200,000 Shekels [around $50,000] to produce the order. Producing
this particular fertilizer also involves dumping a new kind of chemical into
the lake. The only effect of dumping this chemical into the lake will be to
raise the production expenses of a neighboring fertilizer factory, which is
also located at the edge of the same lake. With the exception of the
neighboring factory, the lake water is not used by anyone else. Additionally, the new chemical does not cause any medical problems or damage to
the environment.
Manipulation A: ex ante state: By law, before dumping the new chemical
into the lake, you must pay a license fee of 100,000 Shekels (around
$25,000). You cannot purchase the raw materials needed to make the new
chemical without presenting the permit attained by paying this fee. With
the exception of paying this fee, you do not anticipate any other expenses.
Manipulation B: ex ante individual: By law, before dumping the new
chemical into the lake, you must pay the neighboring factory a sum of
100,000 Shekels (around $25,000). You will be able to purchase the raw
materials needed to make the new chemical only after presenting a permit
showing that the neighboring factory received the aforementioned payment.
With the exception of paying this fee, you do not anticipate any other expenses.
Manipulation C: ex post individual certain: By law, after dumping the new
chemical into the lake, the neighboring factory can sue you for the resultant
increase in his production expenses. There is no question that the neighboring factory will notice that you dumped the chemical, take you to court, and
win the lawsuit. The anticipated cost of the lawsuit is 100,000 Shekels
(around $25,000). With the exception of paying this fee, you do not anticipate any other expenses.
Manipulation D: ex post individual probabilistic: By law, after dumping the
new chemical into the lake, the neighboring factory can sue you for the resultant increase in its production expenses. If the neighboring factory no36
102:#### (2008)
Are All “Legal Dollars” Created Equal?
tices that you have dumped this new chemical into the lake, and if it sues
you, the anticipated cost of the lawsuit is 100,000 Shekels (around
$25,000). That said, the possibility exists that the neighboring factory will
not notice that you have dumped the chemical, and you will therefore not
have to pay anything. With the exception of the possibility of paying this
fee, you do not anticipate any other expenses.
Manipulation E: ex post state certain: By law, anyone who dumps a new
chemical into the lake will be fined 100,000 Shekels (around $25,000) by
the municipal authority. On account of state-of-the-art chemical detection
equipment installed next to your factory, there is no question that the spillage will be detected (after the fertilizer production order has already been
completed). With the exception of the possibility of paying this fine, you
do not anticipate any other expenses.
Manipulation F: ex post state probabilistic: By law, anyone who is caught
dumping a new chemical into the lake will be fined 100,000 Shekels
(around $25,000) by the municipal authority. That said, there is a certain
chance that you will not get caught, as the authorities may not detect any
spillage. No matter what, there is no doubt that you will manage to complete the fertilizer production order before the authorities will be able to detect the spillage. With the exception of the possibility of paying this fine,
you do not anticipate any other expenses.
Control: The control group did not undergo any manipulation.
QUESTIONS (FOR ALL GROUPS):
1. What is the minimal price you will request for producing the fertilizer,
within the framework of the legal situation described above (reminder:
production costs total 200,000 Shekels)?
2. Producing the fertilizer within the framework of the legal situation described above is ethically objectionable: 1 (not objectionable) – 10 (objectionable).
3. Producing the fertilizer within the framework of the legal situation described above is an appropriate step for me, personally: 1 (inappropriate) – 10 (appropriate).
4. Producing the fertilizer within the framework of the legal situation described above does not contradict the law: 1 (contradicts) – 10 (does not
contradict).
37
NORTHWESTERN UNIVERSITY LAW REVIEW
5. As much as possible, I will try not to produce the fertilizer within the
framework of the described legal situation: 1 (will not try) – 10 (will
try).
6. Within the framework of the described legal situation, for the production of the fertilizer I will ask for an especially high price: 1 (low price)
– 10 (high price).
38
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