Fines for Unequal Societies

Abstract

As inequality rises, applying the same fine to rich and poor alike places the former comfortably above the law. In a model of optimal deterrence with risk-averse individuals and unequal wealth distribution, we show that uniform fines are optimal when harm from crime is low, non-monetary sanctions when it is high, and day fines — that is, fines that increase with the wealth of the offender — in the intermediate region. The introduction of day fines reduces the (optimal) use of non-monetary sanctions, and higher inequality weighs in their favor as compared to uniform fines. We show that our predictions are in line with stylized empirical regularities recovered in a novel hand-collected dataset covering 196 countries. A simple numerical simulation highlights the model’s practical implications.

Keywords: law enforcement, deterrence, fines, day fines, income inequality

JEL Classification: D62, D63, H23, K14