They say you catch more flies with honey than with vinegar. They might be wrong. But what would really be great is if the same substance could serve as both honey or as vinegar, as the job requires. Anu Bradford, presenting a paper co-written with fellow Chicago Professor Omri Ben-Shahar, thinks they may have that magic policy in the nettlesome field of international law enforcement.
Enforcement of international agreements is a difficult and costly endeavor. In an ideal world, the threat of sanction would be the preferable way of deterring cheating behavior, because a threat alone is costless. Unfortunately, a threat is only effective if it is credible, and it is only credible if the cost of following through is less than the cost of simply absorbing the bad behavior. Because sanctions are often expensive, many threats of punishment are not credible, and thus bad behavior goes undeterred.
An alternative to punishment (vinegar) is rewards (honey) -- paying off potential violators to encourage them to play nice. Rewards are generally cheaper than punishment, but at root the suffer from a similar problem: if the amount of harm to the enforcer is less than the benefits accruing to the violator, the enforcer has no incentive to offer a reward high enough to convince the wrongdoing to cease misbehaving. Consequently, if there is a desire to continue reducing the level violation below this point (for example, to account for difficult to monetize externalities, as often is the case in environmental regulations)
Bradford and Ben-Shahar's solution is deceptively simple: have the money do both. Enforcers should pre-commit a certain amount of money to an escrow account, with the promise that it will be offered out as a reward to violators who clean up their act. If the violator refuses to do so, then that money is used instead to finance a punishment, effectively multiplying the investment. They analogize this to a system wherein bail money is used to finance bounty hunters (if the defendant skips town). Not only does the wrongdoer lose the money they put up for bail (the reward for coming to trial), but they also face increased resources directed against them as punishment.
Similarly, Bradford and Ben-Shahar offer the example of international emissions regulations. Simplifying the model so it is a bilateral, non-iterated game between a single "enforcer" (e.g., the US) and a single "violator" (e.g., China), they show how the system of a pre-committed dual reward/punishment account set up by the enforcer can convince the violator to lower emissions well lower than where they otherwise would of gone (importantly, the authors stress, this paper takes no stance on the socially optimal level of regulation -- it takes as a given that the enforcer countries have a certain level of enforcement they wish to see, and then offers the tools to get them there).
Of course, latent in any system such as this is a moral hazard problem: if you offer a bribe to countries to convince them to stop violating, then you create an incentive for them to start violating so they can later collect on the reward. To address this problem, the authors suggest that the escrow accounts only be set up for nations which are, by some objective measure, seen as being predisposed towards violation (because they would otherwise benefit from breaking the rules). Moreover, the simplified bilateral nature of their model actually works in their favor with regards to this problem. There is no obligation that an enforcer country offer this deal to every country in the world. Indeed, in the field of international emissions a single performance of this game between the United States and China would account for a huge chunk of the total global emissions problem. Because the system being proposed here is not a general rule but rather a discretionary policy decision that can be applied to (or rejected for) discrete bilateral engagements between two countries, the enforcer only needs to determine whether, in a particular case, the moral hazard risk is genuine or phantasmal (or outweighed by the likely benefits).