Optimal Enforcement with Heterogeneous Private Costs of Punishment
23 Pages Posted: 1 May 2019 Last revised: 25 Mar 2020
Date Written: March 21, 2020
We formalize the idea that regulatory devices may generate different incentive effects for different individuals. These unequal incentive effects can generate social costs by causing some individuals to be over-deterred and others to be under-deterred. This is an underappreciated dimension over which one ought to compare the efficiency of various regulatory tools. We then note various methods to reduce inefficiencies caused by unequal incentive effects. Among others, we show that combining tools which have negatively correlated effects can improve welfare; increasing the probability of detection can be preferable to imposing large transferable sanctions; and fines can be inferior to other regulatory instruments when the harm from offenses vary across offenders.
Keywords: Optimal Enforcement, Fines, Choice of Instruments, Heterogeneous Incentives, Externalities, Regulation
JEL Classification: H23, K14, K23, K42
Suggested Citation: Suggested Citation