Shallow Signals

Article excerpt

CONTENTS

INTRODUCTION                                2229

I. LAW'S HIDDEN PERMISSIONS                 2237

  A. Quiet License                          2237

    1. Paradox of Monitoring                2238
    2. Partial Information                  2239
    3. Private Permissions                  2241

  B. Quiet Compliance                       2242
  C. Quiet Exceptions                       2244
  D. Quiet Tolerance                        2247

    1. Legal Transitions                    2248
    2. Private Enforcers                    2248
    3. Secrecy and Discretion               2249

  E. The Observer in Context                2249

    1. Sophisticated or Naive?              2250
    2. Charitable or Skeptical?             2251

II. When Law Obscures Law                   2253

  A. False Absolutes                        2253

    1. Reverse of Chilling                  2253
    2. Crowding Out                         2254

  B. False Sophistication                   2254
  C. False Harmonization                    2255

III. Revealing Permissions                  2257

  A. Loud Licenses                          2257

    1. Beyond Monitoring                    2257
    2. The "Demodeling" Effect              2258

  B. Confessing Compliance                  2259

    1. Ease and Timing of Disclosure        2259
    2. Ex Post Cures                        2259

  C. Exceptional Spaces                     2262

    1. Borrowing boundaries                 2262
    2. Action Spaces                        2263
    3. The Localizing Effect                2265
    4. Bright Lines Optional                2266

  D. Open Tolerance                         2267
  E. Whose Duty to Distinguish?             2270

IV. When Disclosures Backfire               2270

  A. DYNAMICS of Imitation                  2270

    1. Confidently Wrong                    2271
    2. The Information Ratchet              2272
    3. Regulatory Competence                2273

  B. Adverse Inferences                     2273

    1. A Matter of Expectations             2274
    2. Favoring Costlier Disclosure?        2275
    3. Unraveling and Voluntary Disclosure  2276

  C. Ignorance Externalities                2277

    1. The Ignored Observer                 2277
    2. The Ignorant Observer                2278

V. Unsettling Solutions                     2278

  A. Expressing Permissions                 2279
  B. Knowing Uncertainty                    2281

    1. A Strategy for the Naive             2281
    2. Creating Uncertainty                 2281
    3. Skeptical or Charitable?             2282

  C. Knowing Ignorance                      2284

    1. "Plainly Incomplete" Disclosures     2285
    2. A Strategy for the Sophisticates?    2286

Conclusion                                  2287

Whether in dodging taxes, violating copyrights, misstating corporate earnings, or just jaywalking, we often follow the lead of others in our choices to obey or to flout the law. Seeing others act illegally, we gather that a rule is weakly enforced or that its penalty is not serious. But we may be imitating by mistake: what others are doing might not be illegal -- for them.

Whenever the law quietly permits some actors to act in a way that is usually forbidden, copycat misconduct may be erroneously inspired by the false appearance that "others are doing it too." The use of loopholes or exemptions can cause such illusions of misconduct. So can unseen licenses, cures, or private releases from liability. Selective enforcement, nonharmonization of laws, and legal transitions can also create similar misimpressions. The imitator sees others' actions but not the crucial fact -- of legal permission or tolerance -- that distinguishes them. These behavior signals are "shallow," missing a key dimension. The spread of misconduct can thus be accelerated by a peculiar, avoidable form of information failure.

For a regulator confronting this class of errors, it does little good to express the law in the conventional sense. …