Memorandum, Department of Economics, University of Oslo 1999,06
When uncertain evidence may lead to legal errors, a reduced standard of proof affects the incentive to violate the law. With noisy evidence, an agent may be convicted even if he obeys the law (type I error) or acquitted even if he violates the law (type II error). If the standard of proof is reduced, the expected penalty for minor crimes increases relative to more serious crimes and relative to law compliance. Agents who initially commited minor law violations will become more law compliant, but agents who initially committed violations above a certain level will choose even more serious violations. Thus, the net effect on law violation is ambiguous. The increased probability of type I errors induces excessive law compliance among those who initially complied with the law. The focus is on white collar crime, defined as illegal conduct of an otherwise legal activity.