The Law-Decision Game

We consider a basic model of law formation with limited deterrence where a fully rational law-maker produces law strategically anticipating rational decisions that the law induces. In equilibrium, optimal law can induce optimal choices that are cyclic. Cyclic choices arise when there is a specific preference conflict between the law-maker and the decision-maker and maximum penalties can deter some but not all actions. Moreover, it is only when the law induces cyclic choices that the law and the choices it produces reveal preferences of law-makers and decision-makers. However, it may be possible to determine optimal law according to preferences that are unknown and cannot be inferred from choice.