Fines Versus Imprisonment for the Issuance of Bad Checks: Evidence from a Natural Experiment in Turkey

Abstract

We investigate whether the February 2012 amendments to the Check Law in Turkey that replaced imprisonment with monetary and administrative fines for writing bad checks were a driver of the surge in the frequency of bad checks since late 2011. As the planned amendments were announced well in advance, check issuance behavior was potentially altered before the amendments officially took effect. To capture this, we use the cumulative volume of related keyword searches on the internet as a proxy for the legal change. We find that unlike the case during the global financial crisis, the surge in bad checks around 2012 cannot be explained by the changes in the economic environment unless the February 2012 legal change is also controlled for. We also show that the surge in the incidence of bad checks was not accompanied by an increase in their average value. Finally, we provide evidence that economic agents adapt fairly rapidly to the legal change by adjusting their screening and monitoring capacities, which helps to reverse the surge in bad checks within a year. Overall, our findings suggest that sanctions need not be harsh to deter wrongful behavior as long as appropriate infrastructures that will enable efficient behavioral adjustments are in place.