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On the Interaction between Legal and Reputational Sanctions

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This article shows that reputational sanctions are not, as the literature implicitly assumes, independent of legal penalties. Rather, observers will assess a wrongdoer’s type in light of conduct and the expected legal sanctions for that conduct. For example, if a person commits a wrong even in the face of onerous legal penalties, observers will tend to draw a more negative inference about the wrongdoer’s propensity for wrongdoing than if legal penalties were light. On the other hand, onerous legal penalties may deter wrongdoing even for actors with a relatively high propensity for wrongdoing, which also affects reputational penalties. In addition, this article demonstrates that the literature’s focus on deterrence in considering the relationship between formal and informal penalties is too narrow. It may be socially preferable in some circumstances to adjust legal penalties to allow actors to reveal their types than to adjust legal sanctions to promote optimal deterrence.

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