Carrots versus Sticks
This paper proposes the building blocks towards a general theory on the optimal use of carrots and sticks in legal and social enforcement systems. Although in principle carrots and sticks are equivalent with respect to marginal incentives, the central theme of the paper is that they are nonequivalent in many other respects. Our central finding is that sticks are intrinsically superior to carrots because they are meant not to be applied: sticks incentivize simply by threatening, while carrots incentivize by actually rewarding. Consequently, sticks minimize sanctioning costs, risk bearing and distributional side-effects. We show that a perfectly informed principal will never use carrots. However, sticks are also inherently more dangerous tools in the hands of non-benevolent principals since enforcement under carrots is always Pareto efficient while enforcement under sticks is not even necessarily Kaldor-Hicks efficient. As society becomes more complex, labor more specialized and decisions more decentralized, carrots tend to be increasingly desirable.