Sunday, July 30, 2006

Do Incentives Work?

Update (8/5/2006): In case it wasn't clear, this post was just meant to be a joke. I am a great believer that incentives do work by changing the behavior of people and making them react strategically. In the video above the participants try to do their best to avoid the punishment. Most of the fail, yes, but that's just because they were not given sufficient time to react to the incentive. If they had been given a couple of days to prepare, you can be sure that most of them would have memorized the tongue twister and succeeded in the contest. The original post is below:

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If people expect to receive a punishment when they do something wrong, then they should be incentivized to do things the right way (as long as the punishment is harsh enough). The following video from a Japanese show seems to violate this postulate. In spite of the harsh punishment that is expected, five out of six participants could not say the tongue twister. What was the punishment? Well, check the video and judge by yourself if it was harsh enough.

Saturday, July 29, 2006

To Punish or to Prevent?

'I would free the leader of the terrorist group, for he no longer represents a threat to society'. These words were said by the father of a candidate for the Peruvian presidency, just a couple of months ago. The person he was talking about was Abimael Guzmán, the leader of the terrorist group Sendero Luminoso (Shining Path) who has been in jail since 1992. According to his reasoning, Guzmán should be set free because he is old now, apparently sick, and because of the shining path's disappearance since he was captured.

This is just to motivate what the purpose of the law should be. Indeed, laws are enacted with the purpose of changing the behavior of agents, and this is done by providing them with incentives. In what follows let's just focus on laws that provide negative incentives; that is, punishments.

If it were to be the case that a law only has an effect on the agent that broke it, then the reasoning in the first paragraph would be valid. Say that a law forbids that agents kill people. If someone breaks this law, then this agent should be imprisoned so that he can no longer kill any more people. But if the agent that broke the law can prove that it would be unfeasible for him to kill more people then he should be freed, for the purpose of the law will be met in the future whether he is in jail or not (and indeed, it would be more efficient to free him so that resources don't have to be spent to keep him in jail).

This point of view however, is incredibly naive because laws cannot be applied in isolation to a single agent. As a result, once a law is applied a message is sent to the rest of the society, and its members will react accordingly.

Someone who believes in the naive approach will believe that the best thing to do is to free all those criminals who no longer represent a threat to society. This however will send a clear signal: commit a crime, then behave well and you will be freed. This application of the law has little impact in deterring or preventing other agents from breaking the law. A much greater deterring effect has an application of the law that doesn't just punish an agent for his specific wrongdoing, but that also takes into account the message that is sent: break the law and you will be punished, no forgiveness granted.

It may seem trivial that the purpose of a criminal law is not just to punish, but -perhaps more importantly- to prevent, or to change the behavior of potential law-breakers. This is why decisions from the legal system are made public. A potential paradox here is that if this is true, then the legal system does not necessarily make justice in a specific case, but instead seeks long term efficiency (which can be incongruent with justice in a specific case).

The message that the application of the law sends to other agents is also present, however, in areas other than criminal law. In these areas it is easier to forget the effect that the application of the law will have on future parties, and we might be tempted to apply justice in a specific case. Say a court of law has to decide whether to enforce a contract that has unfair terms against a woman who is single, unemployed and mother of five children, and who wishes to be released from the contract because she didn't read it before she signed it. In this case, allowing her to be released from the contract would seem like the most fair thing to do (considering her situation). However, if she were to be released, then future parties will have little incentives to inform themselves when signing a contract. In addition, future agents will find that fewer possibilities for contracting will be offered, because fewer agents will be willing to engage in such relationships knowing that their contractual partners can get released from their obligations at their own will.