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Social Norms and Legal Design: Fault-Based vs
Strict Liability O§ences
Bruno De§ains^ Claude Fluety
October 2014
Abstract The framing of o§ences is an important issue in legal or regulatory design. Should o§ences be fault-based, for instance involving consid- erations of recklessness or negligence, or should the doing of an act constitute an o§ence per se? We compare the performance, from a de- terrence and enforcement cost perspective, of fault-based versus strict liability o§ences in the economic model of public enforcement of law, extended to incorporate informal motivations and social norms of con- duct. We show that fault-based o§ences are generally more e§ective in harnessing social or self-image concerns for the purpose of inducing compliance. However, this need not always be the case and depends in a complex way on the salience of social norms and on enforcement costs. An optimal legal regime and enforcement policy entails fault- based o§ences when detected violations of the law would seldom occur and strict liability o§ences otherwise. KEYWORDS: Normative motivations, regulatory o§ences, other-regarding behavior, law enforcement, strict liability, fault, compliance, deter- rence. (JEL: D8, K4, Z13)
UniversitÈ PanthÈon Assas and Institut Universitaire de France. E-mail: Bruno.De§ains@u-paris2.fr y UniversitÈ Laval and CIRPEE. E-mail: Claude.Fluet@fsa.ulaval.ca
1 Introduction
Illegal behavior ranges from crimes of great antiquity, such as murder or rape, carrying strong moral opprobrium down to lesser ëquasi-crimesí, e.g., false or misleading advertising, income underreporting in tax Ölings, dis- charges of pollutants, Öshing out of season, and the like. An important issue in legal or regulatory design is the categorization of o§ences. Should they be criminalized or qualiÖed as mere violations punished at most by a Öne? The issue is one which legal systems have been dealing with since the mid 19th century owing to the multiplication of ìmodernîregulatory o§ences, e.g., in factory legislation, food and drug laws or sanitary and public health regula- tions. More recently, from the 1960s onwards, there has been a resurgence of the debate in the wake of the criminal law reforms in many countries. To give but one example, the Model Penal Code of the American Law Institute rejected the principle of strict liability in criminal law. Whether some of- fences should be criminalized has also been contentious in the development of new Öelds of law, in particular competition law, Önancial regulations and environmental protection legislation. The issue is in some respects related to the classical dichotomy between malum in se and malum prohibitum^1. Malum in se means wrong or rep- rehensible in itself. The expression refers to conduct viewed as inherently wrong independently of regulations or laws governing the conduct. For ex- ample, murder and theft would be wrong regardless of the law. By contrast, malum prohibitum refers to conduct that is wrong only because it is prohib- ited by law. Some acts are crimes not because they are inherently bad, but merely because they have been declared illegal by statute law. The distinc- tion is important in most penal systems, if only implicitly. Obviously, many (^1) Another way to describe the underlying conceptual di§erence between malum in se and malum prohibitum is iussum quia iustum and iustum quia iussum, namely something that is commanded (iussum) because it is just (iustum) and something that is just (iustum) because it is commanded (iussum).
that a party is sanctioned whenever he has been found to have caused harm (or expected harm). Alternatively, the rule could be fault-based, meaning that a party who has been found to have caused harm is sanctioned only if he failed to obey some standard of behaviorî. In the present paper, we discuss the issue of legal design from the perspective of harnessing norma- tive motivations. For this purpose, we extend the economic model of public enforcement of law to incorporate normative motivation and pre-existing so- cial norms of conduct. At one extreme, pre-existing social norms concerning a particular act are very weak, so that the policy prescription would be the same as in the standard model. At the other extreme, there is a strong social norm and individuals who are thought not to care would meet strong disapproval. We inquire how the strength of social norms of conduct ó to- gether with social or self-image concerns with respect to deviations from the norms ó a§ect the relative performance of fault-based versus strict liability o§ences from a deterrence and enforcement cost point of view. Consider a situation where formal legal sanctions underdeter. Feasible Önes are bounded and violations of the law are not always detected because enforcing the law is costly. Some individuals nevertheless behave e¢ ciently from a social point of view. Some may do so out of intrinsic moral or pro- social concerns. Other individuals may have no such concerns but would like people to believe that they do or perhaps would want to perceive them- selves as having such concerns; that is, they care about social approval or self image. Social enforcement requires oneís actions to be observable by oneís peers or reference group (family, friends and the like). To the extent that in- formal social sanctions su¢ ce, legal enforcement is of course superáuous. We focus on situations where an individualís actions are not directly observable by society at large or oneís peers. However, legal sanctions provide public information from which inferences can be drawn about the individualsíac- tions and therefore their intrinsic predispositions. Under either fault-based or strict liability o§ences, social and self image concerns provide the non
prosocial individuals with some incentives to mimic the virtuous. The issue is how this ináuences the design of o§ences and the enforcement policy, i.e., resources spent on detecting violations of the law. A basic result is that fault-based o§ences tend to be more e§ective in harnessing reputational concerns. The reason is that being found guilty of an o§ence is then more informative. A strict liability o§ence merely ascertains that the violator committed a potentially harmful action and says nothing about the circumstances in which the action was committed. By contrast, a fault-based o§ence unambiguously reveals reprehensible behavior, thereby providing more precise information about the individualís character. When the social norm is a strong one, with potentially strong stigmatization of violators, socially useful incentives are therefore provided by the signaling role of ìfaultî, allowing greater deterrence or lower enforcement costs when ascertaining ìfaultî involves negligible additional costs. When the social norm is non-existent and legal sanctions are restricted to socially costless Önes (pure transfers), fault-based and strict liability o§ences are equally e¢ cient. However, in intermediate situations with weak social norms, it is not always the case that fault-based o§ences do better than strict liability o§ences in harnessing reputational concerns. Which regime is better depends in a complex way on the underlying situation. We show that the optimal legal regime and enforcement policy are interdependent and entail fault- based o§ences when detected violations of the law would seldom occur and strict liability o§ences otherwise. The dichotomy between fault-based and strict liability o§ences captures an important distinction between ìcriminalizedî o§ences and purely ìreg- ulatoryî o§ences. In our analysis, the legal design problem is approached from a standard utilitarian perspective, in the sense that opprobrium and the reputational e§ects of legal sanctions are only considered for their in- centive e§ects. When o§ences are fault-based, social sanctions tend to be harsher because of more precise reputational e§ects. It follows that fault-
2000b; Teichman 2005). A speciÖc Öeld of the literature studies the relation- ship between morality and law. Cooter (1998) analyzes how law promotes individual incentive to acquire morality and self-control. Posner (1997) ex- plains how law complements or substitutes for social norms. Shavell (2002) compares the two in terms of the social costs of enforcement and the ef- fectiveness in controlling behavior. He argues that, if the expected private gain from undesirable action and the expected harm due to the conduct are large, it is optimal to have law supplement morality and, if morality does not function well, law alone is optimal. In a civil law context, De§ains and Fluet (2013) analyze how liability rules (under the form of damages paid to the plaintif) for misbehavior and social pressure interact to provide incentives to take care and what are the impacts of those interactions on the structure of the legal system. The main point made is that the negligence rule tends to be more e¢ cient than strict liability. The logic is that under the negligence rule, courts assess a personís level of care. Hence, if he is found to be negligent, it will be impossible or unlikely that he is a prosocial person. Thus, for people who want to be viewed as prosocial, the negligence rule provides a reputational incentive to take optimal care. Under strict liability, however, no direct information is provided by the legal system about the level of careó a person who is truly prosocial and took care could have caused an accident nevertheless and be found strictly liable. Hence, the reputational incentive provided by strict liability to take more care, for people who value their reputation, is muted. The focus of that paper is the extent to which formal legal sanctions crowd-out or crowd-in informal motivations under di§erent liability rules. The question of the interaction between law and (moral or social) norms is also important in criminal law. For instance, McAdams and Rasmusen (2007) and Shavell (2002) provide a general discussion of legal sanctions versus informal motivation as regulators of conduct. Fault-based o§ences also bear a relation to the concept of ìexpressive lawî. According to this
view even ìmild lawî, i.e., law backed by small sanctions or poorly enforced, can have desirable e§ects on behavior; see Cooter (1998) and the discussion in Tyran and Feld (2006). Finally, the discussion is also related to the role of stigma and shaming penalties in relation to criminal activity; see Rasmusen (1996), Harel and Clement (2007), and Zasu (2007) among others. Iaccubuci (2014) shows that reputational sanctions are not independent of legal penal- ties but rather in part depend on them. Changing legal penalties to account for the reputational e§ects of misconduct changes the reputational e§ects. The analysis suggests that optimizing legal penalties in light of reputational e§ects is a complex task but a necessary one to improve compliance with legal rules and regulations. Mialom (2014) also demonstrates that morality can enhance the e§ectiveness of law enforcement and that legal rules are necessary when moral rules are easily swayed by social ináuence, especially when such a commitment to regulate behavior is desirable in the long run Our paper aims to contribute to this strand of the literature which views incentives, legal standards, social norms in a encompassing framework. We develop a framework to interpret, from an economic perspective, some of the main characteristics of criminal law. SpeciÖcally, the framing of of- fences is an important issue in legal or regulatory design. Should o§ences be fault-based, for instance involving considerations of recklessness or neg- ligence, or should the doing of an act constitute an o§ence per se? We approach this issue by comparing the performance, from a deterrence and enforcement cost perspective, of fault-based versus strict liability o§ences in the economic model of public enforcement of law, extended to incorporate informal motivations and social norms of conduct. Tradionally, o§ences require proof of one or more ìphysical elementsî ñ the fact that someone did, or failed to do, something, or that something did or did not, in fact, happen. Most o§ences also require proof of a ìfault elementî, or what is sometimes called the ìmental elementî, in relation to a personís conduct. This refers to the state of mind of the person charged
that conduct jeopardising public safety and health may be punishable in the absence of any blameworthy mental state, it sends a strong deterrence mes- sage ((Schae§er and Muller-Langer, 2008). Secondly because, as a practical matter, it would be so extraordinarily di¢ cult to prove that a person ac- tually intended to act so as to jeopardise public safety or health, successful prosecutions would be so unlikely that the law would be meaningless. One of the most common forms of strict liability o§ences of this kind are simple motor vehicle laws. These are intended to underpin public safety, and their utility depends upon the absence of a need to prove ìfaultî when they are contravened. Civil aviation safety regulations are strict liability o§ences for essentially the same reasons.
Consequently, the debate between strict liability and fault in criminal o§ences is a complex one. The legal doctrine sometimes looks for a compro- mise and tries to deÖne the appropriate degree of fault according to di§erent categories of crimes. For instance, Thomson (1994) explains how the Cana- dian Suprem Court relies on the notion of stigma as the primary factor to be considered in determining the constitutionally required degree of fault for crimes such as murders. These debates certainly shed some light on the fault-based vs strict liability controversy for criminal o§ences. However, one needs to go further by identifying the signaling e§ects of the di§erent legal mechanisms when individuals are ináuenced by social norms of conduct and concerns about social approval and self-image.
3 Set-Up
We start by reviewing the basic public law enforcement model, borrowing from Polinsky and Shavell (2000, 2007). Next we extend this model to in- corporate other-regarding behavior. The purpose of the model is to analyze the use of public agents to detect and to punish violators of legal rules. In this context, an individual will commit a harmful act if and only if his gain
from doing so exceeds the Öne that is imposed by the public authority in case of violation. The standard model. Risk-neutral individuals can obtain a private gain g from committing an act causing an external harm of amount h. The gain ó equivalently the opportunity cost of not committing the act ó varies among individuals and depends on the circumstances. The probability dis- tribution is F (g) with density f (g) on the support [0; g], where g > h. Social welfare is the sum of the gains individuals obtain from committing the act less the harm they cause to others. Denoting the individualsí behavior by e 2 f 0 ; 1 g, where e = 1 means commission of the act^2 , and interpreting e(g) as behavior in the circumstance g, social welfare is Z (^) g 0
e(g) (g h) f (g) dg:
Socially optimal behavior is therefore
e(g) =
1 if g h; 0 otherwise. (1) The harmful act is a strict liability o§ence if it is illegal irrespective of circumstances. We refer here to o§enses such as tra¢ c violations, fraudulent advertising, income tax underreporting, illegal parking... The sanction for violating the law is a Öne s, a socially costless transfer of money. The en- forcement policy is summarized by the probability p of detecting violations. The per capita enforcement expenditure is c(p) with derivatives c^0 > 0 , c^00 0. An individual will commit the harmful action if his gain from doing so exceeds the expected Öne, g ps. For a given enforcement policy, welfare is therefore (^) Z (^) g
ps
(g h) f (g) dg c(p): (^2) Observe that we could intrepret the acts in di§erent perspectives: acts of "omis- sion" (not complying with some regulation, e.g. Öre detectors) vs "positive" acts (driving through red light).
optimal probability of detection then satisÖes the Örst-order condition (2) and welfare is the same as with a strict liability o§ence. In this simple set-up, any standard of fault bg ps yields the same outcome. In particular, a standard equal to or greater than the upper bound of possible gains (bg g) is equivalent to a strict liability o§ence: committing the act is then illegal irrespective of possible circumstances. By contrast, if Önes are costly to impose (e.g., there are collection costs) or if sanctions are non-monetary as with prison sentences, one can make the argument that the standard of fault should satisfy bg = ps. Undeterred individuals should not be found to be at fault even though they behave ine¢ ciently from a social point of view, otherwise unnecessary sanction costs are incurred. When sanctions are costly, the advantage of fault-based liability is to rely on the threat of sanctions while avoiding the cost of actually imposing the sanctions. As we assume costless Önes, fault-based liability plays no useful role, at least in the standard model.
Other-regarding preferences. So far we have assumed that behavior depends only on private costs and beneÖts as conventionally deÖned. We now consider informal motivations. We assume that there are two types of individuals. A proportion of individuals, referred to as type t = 1, are ìgood citizensî with prosocial predispositions. These individuals seek to behave in a socially or morally responsible manner. The other group of individuals, referred to as type t = 0, has no such predisposition. Prosocial predispositions are socially valued and individuals who are thought to be good citizens earn status or social esteem, a source of utility. The utility of a type-t individual is ut = w t max(e e; 0) + tI ; t = 0; 1 : (3) The Örst term, w, is net ìmaterialîpayo§ as in the conventional model. For the good citizens, t = 1 and the middle term is the disutility (ìguiltî) su§ered when the individual causes external harm while deviating from what
he knows to be the socially responsible behavior e^ given the circumstances; is a positive parameter su¢ ciently large to intrinsically motivate the good citizen.^3 As deÖned here, the social (or moral) norm of conduct is what everyone should be doing.^4 The third term in (3) is the utility from oneís social image or reputation. All individuals are assumed to care equally about their social image. is a positive parameter and tI E(t j I) is the belief of society at large about the individualís type conditional on publicly available information which is denoted by I. The parameter captures both the importance individuals attach to their social image and the importance (ìsocial pressureî) society ascribes to being a good citizen with respect to the kind of acts considered here^5. Given our deÖnition of types, the conditional expectation E(t j I) is simply the posterior probability that the individual is a good citizen. Observe that status depends on beliefs about what the individual is. What he does matters only in so far as it a§ects these beliefs. In our analysis, an individualís type is private information and much will depend on what information about him is made available in society at large^6. Welfare is the sum of utility over all individuals,
W =
Z (^) g 0 [(1 )u 0 (g) + u 1 (g)] dg (4)
where ut(g) is the expected utility of a type-t individual in the circum- stance g. Before proceeding, we show that socially warranted behavior in the present set-up is the same as in the preceding section. (^3) It will su¢ ce that h, i.e., the good citizenís guilt disutility ìinternalizesîthe harm he causes when 4 e = 1 and e^ = 0. The middle term in (3) is a simple version of Kantís categorical imperative, as in Brekke et al. (2003). 5 beta can be interpreted as the utility of being perceived as good citizen, given that the utility of being perceived as bad citizen is normalized to zero 6 and depend on social preferences with respect to the kind of situation (and there- fore possible acts) considered here. For instance, when e = 1 is a particularly reprehensible action in ordinary circumstances , will be large and presumably so will be
newsî. The latter means that either the individual did not commit an o§ence or that he did but was not detected. In terms of the previous notation, the publicly available information a§ecting oneís reputation is therefore the binary signal I 2 fG; N g. The signiÖcance of the signal will depend on the legal regime, in particular whether o§ences are strict or fault-based, and on the enforcement policy. We adopt here an interpretation of self- image that is developed by Bodner-Prelec (2003) and Benabou-Tirole (2006). These authors have incorporated concern for image into models of individual decisions by formalizing them as preference-signaling games and by applying the concept of signaling equilibrium to analyze behavior. These models feature a decision-maker with unobservable preferences over outcomes, who also derives value from the endogenously determined beliefs of an observer about those preferences.
4 Equilibrium under a Given Regime
This section describes the equilibria under given legal regimes and enforce- ment policies. A (perfect Bayesian) equilibrium is characterized by the indi- vidualsíaction proÖles and the beliefs about individualsítype conditional on the ìguiltyîand ìno newsîevents. The legal regime is deÖned by the stan- dard of fault when committing the harmful act. The regime is fault-based if the legal standard is less the upper bound of possible gains, otherwise the regime involves a strict liability o§ence. The enforcement policy is char- acterized by the Öne for unlawful conduct and the probability of detecting such behavior. We proceed in three steps. First we derive the action proÖles taking the posterior beliefs as given. Next we derive the beliefs as a function of action proÖles. Finally we solve for the equilibrium wherein action proÖles and beliefs are consistent with one another.
Incentives. Let the sanctioning rule be denoted by (g; gb), where
(g; bg) = 1 if g < bg and is otherwise zero. The expected utility of a type-t individual in the circumstance g is
ut = w + e [g p(g; bg)s] t max(e e(g); 0)
pe(g; bg)tG + (1 pe(g; bg)) tN
; e 2 f 0 ; 1 g; t 2 f 0 ; 1 g: The Örst term, w, is the part of the individualís wealth that he takes as given. This consist of initial wealth minus the average harm caused by others plus the per capita tax to Önance the enforcement policy (surveillance expenditures minus Önes collected). The second term is the expected net material payo§ from committing or not committing the harmful act. The third term is the guilt disutility from committing the harmful act when it is socially unwarranted. The fourth term is the expected reputational utility. If the individual does not commit the harmful act, e = 0, or if he would not be legally at fault when he does, (g; bg) = 0, the belief about his type will be tN for sure, the posterior probability that he is a good citizen given ìno newsî. If he unlawfully commits the harmful act, he is detected with probability p and the belief about his type is then tG, the posterior probability conditional on ìguiltyî. If he is not detected, the belief is again tN. These beliefs are determined at equilibrium but are taken as given by the individual. Consider a non prosocial individual. If the harmful act is not committed, expected utility is ut = w + tN. If it is committed and it is lawful, that is g bg, expected utility is ut = w +g + tN. Hence it will then be committed. In circumstances where the act is unlawful, expected utility is
ut = w + (g ps) + (ptG + (1 p)tN )
and the act is then committed if g p(s + ), where tN tG will be referred to as the reputational penalty from being found guilty of an o§ence. Altogether a non prosocial commits the harmful act if and only if
g min[bg; p(s + )] g 0 ; (7)
type. The behavior of others a§ects the payo§s from oneís actions thought its e§ect on the social signiÖcance of the ìguilty-no newsîevents, as captured by the beliefs tG and tN. Using Bayesírule, the posterior beliefs conditional on ìguiltyî or ìno newsî ó and therefore the reputational penalty ó can be expressed as a function of the compliance rates. We restrict attention to compliance rates satisfying Lemma 1.
Lemma 2 If yb 1 , the reputational penalty as a function of y 0 satisÖes and is decreasing in y 0 down to = when y 0 = yb. If by > 1 and y 0 < y 1 = 1, > 0 and is decreasing in y 0. If y >b 1 and y 0 = y 1 1 , = 0.
The intuition is straightforward. Given Lemma 1, unless both types behave the same, bad citizens are more likely to commit the harmful act. Therefore they are more likely to be found guilty of an o§ence, implying that the event ìguiltyîis bad news concerning the individualís type compared to ìno newsî. When the fault-standard satisÖes bg h, good citizens are never found guilty. An o§ence then reveals perfectly that the individual is non prosocial, so that tG = 0 and = tN. The more the non prosocial behave like good citizens, the smaller tN. When everyone behaves the same, the event ìno newsî is totally uninformative because it occurs with certainty. The posterior probability therefore equals the prior that an individual is a good citizen.^8 When bg > h, both good and bad citizens will at times be found guilty, hence tG > 0. As long as violating the law is more likely for bad citizens, tN > tG and the reputational penalty is positive. When both types behave the same, the events ìguiltyîand ìno newsîare uninformative and posterior beliefs equal the prior in either case. (^8) The event ìguiltyî is then an out-of-equilibrium event with zero probablity, implying that tG cannot be computed using Bayesírule. The reputational penalty is obtained from limy 0 " 1 = limy 0 " 1 tN = . This can also be rationalized in terms of Cho and Krepsí (1987) D1 criterion.
Figure 1 provides examples of the reputational penalty as a function of the bad citizensí compliance rate under two di§erent legal regimes, given y 1 = 1. The enforcement policy is the same under both regimes. In case A, the standard of fault is the Örst-best bgA = h, equivalently byA = 1. The reputational penalty is then bounded below by . In case B, the standard of fault is above the Örst best, ybB > 1. The reputational penalty then goes down to zero when all the non prosocial comply perfectly. For compliance rates su¢ ciently close to unity, the reputational penalty under regime A is therefore larger than under B. As depicted, the curves intersect. This need not occur but it is a possibility at su¢ ciently small compliance rates. I will discuss this further when we turn to legal design.
Figure 1 about here
Equilibrium. From the foregoing discussion, both types behave the same if they overcomply, so that the reputational penalty is then nil. Be- cause reputational concerns then provide no incentives, overcompliance can arise only if the expected Öne ps > h as in the standard model with no in- formal motivations. We disregard policies with ps > h because they would serve no purpose. In the cases considered, good citizens therefore always perfectly comply with the social norm of conduct. An equilibrium consists of a compliance rate for the non prosocial and of a reputational penalty that are mutually consistent, given that good citizens perfectly comply.
Proposition 1 Let the enforcement policy and legal regime satisfy ps h and bg ps. Then there is a unique equilibrium with y 0 y 1 = 1. (i) If ps = h, y 0 = 1 as well. (ii) If ps < bg h, the equilibrium y 0 is increasing in p as long as p(s+ ) < bg, otherwise y 0 = F (bg)=F (h); in either case, y 0 is increasing in bg. (iii)If ps < h < bg, the equilibrium y 0 is increasing in p and may be increasing or decreasing in bg.
