Abstract

Modern legal systems increasingly rely on positive incentives, such as rewards and bonuses, to enhance compliance to legal rules. In parallel, recent economic literature on deterrence shows that carrots can be superior to sticks in situations with high degrees of complexity, particularly when people have very different compliance costs and lawmakers do not know these costs. Against this background, the paper analyses the rationale behind the «Legality Rating System», a reward mechanism aimed to deter firms’ misconduct and enhance business integrity, introduced by the Italian legislator in 2012. According to such mechanism, firms that are compliant with business laws and regulations are eligible for a legality rating which is awarded upon request by the Italian Competition Authority. The possession of the legality rating gives companies a better access to public funding and credit from banks as well as some advantages when participating in public tenders. Looking at the legality rating in the light of the advantages of carrots over sticks in complex settings and considering firms’ increasing interest towards this reward mechanism, the paper argues that the legality rating is a valuable tool to enhance firms’ compliance to market rules.