The Option Value of Record-Based Sanctions

66 Pages Posted: 27 Jan 2020 Last revised: 29 Mar 2021

Date Written: January 5, 2020

Abstract

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

Leshem, Shmuel and Tabbach, Avraham D., The Option Value of Record-Based Sanctions (January 5, 2020). Available at SSRN: https://ssrn.com/abstract=3514094 or http://dx.doi.org/10.2139/ssrn.3514094

Shmuel Leshem

Independent ( email )

Los Angeles, CA

Avraham D. Tabbach (Contact Author)

Tel Aviv University ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

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