Deterrence and Information: The Optimal Use of Monetary and Nonmonetary Sanctions Revisited
19 Pages Posted: 20 Apr 2005
Date Written: January 2005
It is a widely accepted conclusion of the economic literature on deterrence that nonmonetary sanctions should be introduced only when monetary fines have been used up to their maximum extent. However, this conclusion is at odds with what is commonly observed e.g. in the case of deterrence of driving offenses, where nonmonetary sanctions such as licence suspension or vehicle withdrawal are extensively used, even though it would be possible to apply a monetary sanction of equivalent value.
In this paper it is shown that when the sanctioning policy conveys information about the riskiness of the sanctioned behavior, the conclusion about the optimal use of nonmonetary sanctions may be different. Namely, the use of nonmonetary sanctions can be optimal even though the monetary fine is not maximal. The argument is formalized in a model with rational though uninformed individuals, who know that the enforcer has superior information about the riskiness of action but are uncertain about the true objectives of the enforcer.
Keywords: Optimal deterrence, nonmonetary sanctions, driving offenses
JEL Classification: K42
Suggested Citation: Suggested Citation