A generalized model for reputational sanctions and the (ir)relevance of the interactions between legal and reputational sanctions

Abstract

Reputational sanctions and stigmatization costs share many things in common. In particular, wage reductions in the labor market caused by stigmatization (Rasmusen, 1996), and profit reductions in commercial markets caused by reputational losses due to a firm's previous wrong-doings (Iacobucci, 2014) share many similarities. In this article, I construct a model in which Rasmusen (1996) and Iacobucci (2014) emerge as special cases. I use this model to show that increasing the legal sanction (or the probability of detection) cannot cause a reduction in reputational losses that off-sets the increase in expected total sanction. This clarifies ambiguities in the previous literature, and implies that, absent further considerations, deterrence is enhanced by an increase in legal sanctions and/or the probability of detection. Thus, standard Beckerian dynamics are preserved even when reputational sanctions interact with formal sanctions.