LABELING THEORY SUGGESTS THAT LEADERS RESPONSIBLE FOR ENFORCING THE LAW RESPOND TO THE CRIME THEY SEE BY USING INCREASED PUNISHMENT AS A DETERRENCE. RECIPIENTS, HOWEVER, OFTEN RESPOND TO THIS PUNISHMENT WITH A FEELING OF INJUSTICE. THEY THEN BREAK THE LAW MORE FREQUENTLY AND CREATE EVEN MORE SERIOUS PROBLEMS. THE OPERATION OF THIS TYPE OF DILEMMA IN A U.S. ARMY POPULATION WAS TESTED WITH CROSS-LAGGED PANEL CORRELATION, USING COMPANIES (GROUPS OF ABOUT 200 SOLDIERS) AS THE UNIT OF ANALYSIS. IN 50 COMPANIES, COMPANY LEADERS PUNISHED THEIR SUBORDINATES, PARTICULARLY BLACKS, AS A RESPONSE TO THE LAWLESSNESS THEY ATTRIBUTED TO THESE SUBORDINATES. SUBORDINATES RESPONDED TO THIS PUNISHMENT WITH A SENSE OF BEING UNJUSTLY TREATED WHICH LED TO INCREASED LAWLESSNESS. OBSERVATIONS ARE OFFERED ABOUT THE USEFULNESS OF THE METHODOLOGY (USING GROUPS THAT ARE ASSOCIATED TOGETHER AS THE UNIT OF ANALYSIS), AND THE IMPLICATIONS OF THE DILEMMA FOR LAW-ABIDINGNESS. SOCIETY'S MORAL RELATIVITY (DIFFERENT GROUPS DISAGREEING OVER MORALITY AND LEGALITY OF VARIOUS ACTIONS) AND THE MOVEMENT AWAY FROM TRADITIONAL VALUES COULD CAUSE AN INCREASE IN THE LABELING RESPONSE TO PUNISHMENT. REFERENCE NOTES AND A LIST OF REFERENCES ARE INCLUDED. (SEE NCJ 65332) (AUTHOR ABSTRACT MODIFIED - MJW)