wedrifid comments on Terminal Bias - Less Wrong
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This is an interesting one. The naive answer is that it doesn't matter who gets punished as long as the incentive is strong enough to overcome the disutility of punishment.
You'd have a hard time showing that the incentive is enough, tho:
This is not a rational defection, so punishment is only partially useful.
Punishing someone else is not as strong a disincentive as punishing the perp. Family bonds are usually weaker than self preservation, and in many cases, totally absent. If you modified it to see if the family bonds were strong before punishing
someone else, that would create an incentive to not associate with family.
This policy puts a load on the family that is present even if no crime is ever committed. Putting this load on everybody for the sake of a decrease in an already small crime rate probably isn't worth it.
Add in a fourth consideration: If my brother is plotting to overthrow the government and this kind of system is in place I have just been given a massive incentive to assist him in every way possible - and nearly all negative incentive is removed.