Document Type


Publication Date



Center for Contract and Economic Organization


Program in the Law and Economics of Capital Markets


The law influences the behavior of its citizens in various ways. Well understood are the direct effects of legal rules. By imposing sanctions or granting subsidies, the law either expands or contracts the horizon of opportunities within which individuals can satisfy their preferences. In this way, society can give incentives for desirable behavior. The direct effects of legal rules on individual behavior have been a fruitful source of inquiry for analysts using the techniques of law and economics. Modeling the incentive effects of legal rules provides a useful predictive tool for positive theory and normative critique. Indeed, the tools of economics are well suited to analyzing variables – such as legal rules – that stimulate changes in the costs of certain behaviors.

In recent years, the social norms literature has shown that law can also have indirect effects on incentives. Thus, for example, a legal ban on smoking in public places or a "pooper-scooper" law can motivate citizens not to smoke in certain areas or to clean up after their dogs even where the state has no resources invested in direct (or first order) enforcement. By empowering neighbors and other citizens to use public ridicule as an enforcement technique, these laws can influence behavior by imposing informal (or second- order) sanctions, such as shaming. Similarly, these laws can have self-sanctioning (or third order) effects to the extent that citizens internalize the legal rule and are deterred by the prospect of guilt. These latter effects require that legal rules be mediated through social phenomena – social norms and human emotions – that are highly complex and only imperfectly understood. In the case of a shaming sanction, the law must rely on existing normative structures to influence in predictable ways the "expression" or social meaning of the disfavored (or favored) action. In the case of self-sanctions, the law must rely on the even more complex phenomenon of internalization of normative behavior.

One way to understand these indirect effects is through the same rational choice lens that has proven tractable in studying the direct effects of legal rules. Thus, the analyst might continue to treat values, moral character, and preferences as exogenous, not because these phenomena are unimportant, but because her analytical tools don't allow her to say anything systematic about them. This "parsimonious" approach would begin with the assumption that law has no systematic influence on behavior except in how it affects the costs of that behavior, either directly through legal sanctions or indirectly by stimulating social sanctions associated with that behavior.


Copyright is owned by the Virginia Law Review Association and the article is used with the permission of the Virginia Law Review Association.