Framework
Costly Punishment Framework
TL;DR
Four-condition framework for determining whether market punishment will effectively deter cheating behavior, derived from the Chipotle food safety case.
Four-condition framework for determining whether market punishment will effectively deter cheating behavior, derived from the Chipotle food safety case.
When to Use Costly Punishment Framework
When assessing whether market forces alone will prevent cheating in an industry, or when designing enforcement mechanisms that rely on costly punishment.
How to Apply
1
Punishment Cost Must Exceed Cheating Gains
Expected punishment must be larger than savings from cheating
Questions to Ask
- What is the total cost if cheating is discovered?
- What is the expected benefit from cheating?
Outputs
- Calculation: punishment cost vs. cheating gain ratio
2
Punishment Must Be Probable Enough
Probability of punishment must make expected value of cheating negative
Questions to Ask
- What is probability of detection?
- Probability × punishment cost > cheating savings?
Outputs
- Expected value calculation for cheating decision
3
Punishers Must Bear Acceptable Costs
Those who punish must find punishment costs lower than tolerating cheating
Questions to Ask
- What does punishment cost the punishers?
- Is that less than cost of tolerating cheating?
Outputs
- Punisher cost-benefit analysis
4
Punishment Must Be Observable
Other potential cheaters must see punishment to adjust their behavior
Questions to Ask
- Is the punishment visible to the industry?
- Do other firms observe and update behavior?
Outputs
- Deterrence visibility assessment