The Option Value of Record-Based Sanctions
36 Pages Posted: 27 Jan 2020
Date Written: January 5, 2020
This paper offers an option value-based rationale for the consideration of a non-compliance record in sentencing decisions. We study compliance decisions of a population of individuals who live for two periods. We show that when non-compliance benefits are random and independent across periods, increasing or decreasing sanctions produce different option values to current-period compliance and non-compliance. The difference between these option values provides incentives for present-period compliance and facilitates a more efficient allocation of sanctions across periods. The optimal sanction scheme depends on the magnitude of the overall sanction relative to the distribution of benefits from non-compliance.
Keywords: Graduated sanctions; Repeat Offenders; Option value
JEL Classification: D82, K42, G13
Suggested Citation: Suggested Citation