The Optimal Tradeoff between the Probability and Magnitude of Fines

12 Pages Posted: 25 Aug 2000

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

Stanford Law School; National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Date Written: January 1981

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.

Suggested Citation

Polinsky, A. Mitchell and Shavell, Steven, The Optimal Tradeoff between the Probability and Magnitude of Fines (January 1981). NBER Working Paper No. R0136. Available at SSRN: https://ssrn.com/abstract=240091

A. Mitchell Polinsky (Contact Author)

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Steven Shavell

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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