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Giuseppe Dari-Mattiacci on Transaction Costs - Dictionary of Arguments

Parisi I 443
Transaction costs/incentives/carrots/sticks/Dari-Mattiacci/De Geest: Assume (…) that applying carrots and sticks generates a transaction cost. Note that we need to consider only the cost of applying the sanction and not the cost of monitoring the agent; the latter cost depends on the probability of monitoring p (which is only indirectly affected by the choice of carrots or sticks through a possible change in the optimal probability of monitoring).
>Incentive/Dari-Mattiacci/De Geest
Parisi I 444
(…) if there are more frequent errors with violators than with compliers—then applying carrots becomes relatively more costly than applying sticks. The intuition is that the costs of sanctions are realized when sanctions are applied. Thus, wrong applications of a sanction weigh more on costs than wrong denials of a sanction. From a different angle, an improved quality of the information that the ruler gathers makes carrots more desirable only if most of the population complies.
Errors: (…) assume that there are no errors. Here the optimal choice between carrots and sticks depends on the level of enforcement.
Parisi I 445
If the costs of carrots and sticks are the same (kc = ks), we obtain a pure majoritarian criterion: carrots should be applied if fewer than 50% of the agents comply, sticks otherwise (Wittman, 1984)(1).
>Information/ Dari-Mattiacci/De Geest.
Parisi I 453
Errors: Note that errors create fixed rents or impose fixed costs that are equal for all individuals in expected terms; therefore, the only distributional effects within the group of agents derive from differences in effort costs.
>Sanctions/Dari-Mattiacci/De Geest.
Parisi I 454
General carrots and sticks make compliers with a high effort cost Relatively poorer compared to compliers with a Low Effort Cost. This effect can be removed Through individualized carrots but not through individualized sticks.
Parisi I 454
Remarkably, individualizing sticks does not make their distributional effects disappear. To illustrate, suppose that agent A has an effort cost of $80 while agent B has an effort cost of $90. Instead of threatening all agents with a $100 stick, the principal now threatens agent A with a $81 stick and agent B with a $91 stick. Both agents comply. At the end of the day, compliance still made agent A $80 poorer and agent B $90 poorer. The reason why the distributional effects of individualized sticks are the same as of general sticks is that sticks are meant not to be applied. If they are not applied, their magnitude cannot change the distribution.

1. Wittman, Donald A. (1984). “Liability for Harm or Restitution of Benefit?” Journal of Legal Studies 13: 57–80.

Giuseppe Dari-Mattiacci and Gerrit de Geest. “Carrots vs. Sticks”. In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments
The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
Dari-Mattiacci, Giuseppe
Parisi I
Francesco Parisi (Ed)
The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017

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