hero working papers

Norm Flexibility and Private Initiative

Number: 314
Year: 2006
Author(s): Giovanni Immordino, Marco Pagano andMichele Polo
We model an enforcement problem where firms can take a known and lawful
action or seek a profitable innovation that may enhance or reduce welfare. The legislator
sets fines calibrated to the harmfulness of unlawful actions. The range of fines defines norm
flexibility. Expected sanctions guide firms' choices among unlawful actions (marginal deter-
rence) and/or stunt their initiative altogether (average deterrence). With loyal enforcers,
maximum norm flexibility is optimal, so as to exploit both marginal and average deterrence.
With corrupt enforcers, instead, the legislator should prefer more rigid norms that prevent
bribery and misreporting, at the cost of reducing marginal deterrence and stunting private
initiative. The greater is potential corruption, the more rigid the optimal norms.

Keywords: norm design, initiative, enforcement, corruption
JEL codes: D73, K21, K42, L51