In our previous post, we asked: what is the optimal level of cheating in any given domain, such as business, dating, politics, sports, etc.? It turns out there is a long-standing literature on this problem, going back to such philosophical giants as Thomas Hobbes, Cesare Beccaria, and Jeremy Bentham. Broadly speaking, these great thinkers saw cheating and wrongdoing as a function of the probability of getting caught or punished for one’s misdeeds, so this tradition in political philosophy emphasizes the deterrent effect of law and social norms. In brief, the deterrence approach assumes that people decide whether to obey or evade the law or norms after rationally calculating the gains and consequences of their actions. The late Chicago economist Gary Becker revived this approach in the 1960s and 1970s, and since then, some of the best and brightest economists of our times have thought about this problem (compliance vs. evasion), modelling the decision whether to evade or comply as a form of decision-making under uncertainty. The source of the uncertainty varies in these second-generation models, depending on whether the law itself is unclear (legal uncertainty), or on whether enforcement is uncertain (detection uncertainty). We will discuss the difference between these two types of uncertainty in our next blog post.
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