Fines versus Prison for the Issuance of Bad Checks : Evidence from a Policy Shift in Turkey

We investigate whether the February 2012 amendments to the Check Law in Turkey that replaced imprisonment with administrative fines for issuing bad checks were a driver of the surge in bad checks since late 2011. As the change in the law was foreseen, we argue that check issuance behavior was altered before the new law became official. To capture this, we use the cumulative volume of internet search queries related to the upcoming legal change. We find that, unlike the case during the global financial crisis of 2008-09, the surge in bad checks occurring in 2011-12 cannot be accounted for by the state of the economic environment unless the effects of the February 2012 law change are also controlled for. We also provide evidence that economic agents adjust fairly rapidly to the legal change, which reverses the surge in bad checks within a year. Overall, our findings suggest that sanctions need not be harsh to deter non-violent offenses provided that appropriate institutional structures are in place