Liars and Outliers (16 page)

Just like reputational pressure, institutional pressure requires consequences to work. The difference is that while reputational consequences are informal, institutional consequences are formal, codified, and tangible. These can be punishments, more properly called sanctions, or rewards, better called incentives.

Think back to Bob and Alice in their respective prison cells, making their own risk trade-offs. Not implicating others enhances the reputation of a criminal; additionally, criminal organizations hunt down and punish those who don't keep silent.

You could argue whether the criminal code of silence—and the practice of killing police informants—belongs in this chapter or the previous one. I suppose it depends on how formal the rules are. Certainly it goes far beyond shunning.

Sanctions serve several purposes. Modern penologists hold that prisons are primarily intended to reeducate and reform, minimizing recidivism. Financial sanctions serve as a penalty, raising the financial cost of defecting. And, unfortunately, both have an aspect of revenge about them—another formalization of reputational pressure.
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But the part of it that matters most for societal pressure is the deterrent effect. A rule or law will encourage some people to cooperate simply based on their innate moral tendency to obey authority and follow the rules, but primarily—like reputational systems—laws rely on punishment as a deterrent to defection. Unlike reputational systems, though, imposing sanctions is more formalized.
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This doesn't necessarily mean something that has been written down and agreed to like a legal code, although it generally is. Sanctions reduce the number of defections. And recalling the Bad Apple Effect from Chapter 7, they prevent further defections.

The general idea of such rewards is to formalize coercion. Even prohibitive laws have some aspect of this; they're prescriptive as well as punitive. They operate both before the decision about whether to cooperate or defect occurs, by providing guidelines for acceptable behavior and prior notification of any penalties, and afterwards, through enforcement.

Laws are only as good as society's ability to enforce them. It's not enough to pass a law requiring people to pay their taxes, or banning child labor, or limiting the amount of insect parts in your breakfast cereal; if you don't also sanction defectors, the laws will not act as much of a deterrent. Fines have to be assessed and collected. Jail time has to be served. And all of this has to be implemented with an eye towards solving the societal dilemma.

Alexander Hamilton
said as much in
The Federalist 15
:

It is essential to the idea of a law, that it be attended with a sanction; or, in other words, a penalty or punishment for disobedience. If there be no penalty annexed to disobedience, the resolutions or commands which pretend to be laws will, in fact, amount to nothing more than advice or recommendation.

Sanctions fall into three basic categories: confiscation of resources or possessions, shaming, or physical penalties. Fines and forced servitude fall into the first category, and the last category further breaks down into incarceration, physical harm, and execution. Shaming and physical harm were more common historically; the stocks are a good example of both, as people restrained by them could be abused by the community. Sex offender registries are a common modern shaming sanction, but others—such as requiring an offender to stand in a public place wearing a sign that broadcasts the nature of his offense—are slowly making a comeback, in spite of persuasive arguments that they are
immoral, ineffective
, and degrade the public as much as those subjected to them. House arrest, monitored by an electronic bracelet, has a shaming aspect too. So does community service, if it's obvious and in public.

Most modern sanctions consist of either incarceration or financial penalties. Incarceration removes the defector from society for a period of time, and prevents him from committing further defections. Done right, jail is a place to reform criminals. Done wrong, jail is a place where criminals learn how to be better criminals.

Financial penalties can be tricky to implement, and are therefore worthy of a longer discussion. Speeding is a risk trade-off. There are risks to speeding—accidents—but there are also rewards, such as getting to your destination sooner or the adrenaline rush that comes with driving faster. There are all sorts of pathologies in the trade-off—the rewards are immediate and constant, but the risks are nebulous and only happen occasionally—and one might think there's no reason society can't just let people make the trade-offs by themselves.

The problem is that when Alice speeds, she also increases the risk to everyone around her.
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So there is a societal dilemma at work, and if you want Alice not to speed you're going to have to make it illegal and penalize her for doing it. Studies show that
fines reduce speeding
overall, even though they don't deter habitual speeders. Drunk driving laws and their enforcement are a similar example.

It's vital for the financial penalties to be high enough to make the behavior unprofitable. For example, if customs has a 10% chance of catching a smuggler, then the penalty for smuggling needs to be at least ten times the value of the goods—otherwise it would make financial sense to smuggle. One report demonstrated that
uninsured drivers
in the UK are capable of doing the math, and will remain uninsured if the expected penalty for doing so is less than the cost of insurance. This is even more important when dealing with corporations; there are many examples of fines being so small as to be viewed as an incidental cost of doing business. We'll talk about this more in Chapter 13.

Fixed financial penalties are regressive. Like everything else about the speeding trade-off, the cost of a speeding ticket is relative. If you're poor, a $100 speeding ticket is a lot of money. If you're rich, it's a minor cost of the trip.
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Finland, Denmark, and Switzerland address the problem by
basing traffic fines
on the offender's income. Wealthy people in those countries have regularly been issued speeding tickets costing over $100,000. You might disagree with the system as a matter of policy, but it certainly is a more broadly effective societal pressure. Jail time for speeders accomplishes much the same thing.

There are two basic ways the law can prescribe financial penalties. It can pass a direct law, or it can institutionalize liabilities. If the affected individuals can sue the defectors and win sufficient punitive damages, that will also increase the cost of defecting. In both cases, laws remove the externality by making sure the defector pays the cost of defection. Watch how it works:

• Overfishing
  . Pass and enforce a law fining (or even jailing) those who overfish, and the dilemma goes away. Assuming the cost of the fine multiplied by the probability of getting caught—that's “cost” defined broadly, in terms of money, jail time, social stigma, whatever—is greater than the value of the additional fish, it changes Alice's risk trade-off.
  
• Polluting the river
  . Allow people living downstream from the polluter to sue. Assuming the court system works properly, the cost of the lawsuits to the polluter will be greater than the cost not to pollute the river.
  
• Unsafe food handling
  . Consumer protection laws raise the cost of ignoring food safety—presumably to save money—by imposing financial penalties on those who engage in it.
  

All this assumes a system where both the plaintiff and the defendant can afford the same quality of legal representation. The trade-off changes when the river polluters are corporations with deep pockets, and the people affected don't have the means to pay for lawyers. Or when the bad behavior occurs when foreign companies import food into another country, and the probability of getting caught is low. Again, we'll return to these considerations in Chapter 13.

Taxes can be another type of institutional pressure. It's weird, because it doesn't actually prohibit anything. But if the goal is to reduce the scope of defection, charging people for their marginal defection is one way to do it. Like fines, taxes increase the cost of defecting. But unlike fines, they operate during and not after the defection.
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For example, a sanction for littering requires the authorities to detect the crime and then assess the penalty. This happens after the littering occurs, and there's always the chance of not getting caught. A tax on excess trash occurs at the time of trash pickup, although the person may pay the tax later.

The societal dilemma surrounding antibiotics mirrors the one surrounding vaccination: overuse vs. underuse. It's in everyone's immediate self-interest to use antibiotics to treat conditions that respond to them, but if they're overused, bacteria develop resistance, making them ineffective for everyone. A big part of the problem is the wholesale use of antibiotics in agriculture: administering antibiotics to livestock in order to produce faster growth, regardless of whether they are needed to treat disease. The problem of antibiotic-resistant supergerms is an externality. But doctors also contribute significantly to the problem; they frequently prescribe antibiotics in cases where they're not really necessary. But here again, use of antibiotics makes sense from the perspective of the doctor, who reasons that they won't hurt and might help the immediate patient, whose patients regularly ask for them, and to whom the larger social costs are an externality as well.

One solution, proposed by the Infectious Diseases Society of America, is to
tax the use of antibiotics
. This is a societal pressure, increasing the cost of using antibiotics as a way to remove the externality. We can debate the effectiveness of the measure: it'll definitely help in agricultural uses, but how much it will reduce superfluous doctor prescriptions will depend on who pays the tax and how. Not to mention how easy it would be to smuggle in untaxed antibiotics.