The Optimal Tradeoff Between the Probability and Magnitude of Fines

Abstract:     
This paper examines the use of fines and imprisonment to deter
individuals from engaging in harmful activities. These
sanctions are analyzed separately as well as together, first for
identical risk-neutral individuals and then for two groups of
risk-neutral individuals who differ by wealth. When fines are
used alone and individuals are identical, the optimal fine and
probability of apprehension are such that there is some
"underdeterrence." If individuals differ by wealth, then the
optimal fine for the high wealth group exceeds the fine for the
low wealth group. When imprisonment is used alone and
individuals are identical, the optimal imprisonment term and
probability may be such that there is either underdeterrence or
overdeterrence. If individuals differ by wealth, the optimal
imprisonment term for the high wealth group may be longer or
shorter than the term for the low wealth group. When fines and
imprisonment are used together, it is desirable to use the fine
to its maximum feasible extent before possibly supplementing it
with an imprisonment term. The effects of risk aversion on
these results are also discussed.

Number of Pages in PDF File: 12

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