The Option Value of Record-Based Sanctions
66 Pages Posted: 27 Jan 2020 Last revised: 29 Mar 2021
Date Written: January 5, 2020
This paper offers an option value-based rationale for the consideration of non- compliance record in punishment. We study compliance decisions of a population of individuals who live for two periods, where each individual's non-compliance benefits are random and independent over time. Because increasing or decreasing sanction schemes produce different option values to current-period compliance and non-compliance, an optimal sanction scheme involves a trade-o§ between present and future compliance. This trade-o§ increases incentives for present compliance while facilitating a more efficient allocation of sanctions across periods. The optimal sanction scheme accordingly depends on the overall sanction and the distribution of non-compliance benefits.
Keywords: Graduated sanctions; Repeat Offenders; Option value
JEL Classification: D82, K42, G13
Suggested Citation: Suggested Citation