Deterrence Using Peer Information

We propose a deterrence mechanism that utilizes insider information criminals collect through customary practices. Under this mechanism, a suspect caught committing a criminal act can nominate a person who has committed a similar crime, and only the more severe offender is penalized. Nash equilibrium predicts lower crime levels with this mechanism than in the commonly used regulatory practice where the authority only punishes the first suspect. The experiment confirms the mechanism’s deterrence effect and uncovers that the deterrence effect is insensitive to network structures summarizing insider knowledge. These findings are consistent with behavioral explanations. Our results inform policymakers of the potential usefulness of the peer-informed audit mechanism