A Signalling Theory of Nonmonetary Sanctions
Posted: 7 Dec 2006
It is a widely accepted conclusion of the economic literature on optimal law enforcement that nonmonetary sanctions should be introduced only when fines have been used up to their maximum extent. In this paper it is shown that when the sanctioning policy conveys information about the harmfulness of the sanctioned behavior, the use of nonmonetary sanctions can be optimal even when the monetary fine is not maximal. The argument is formalized in a model with rational but uninformed individuals, who know that the enforcer has superior information about the harmfulness of actions but are uncertain about the true objectives of the enforcer.
Keywords: Optimal deterrence, nonmonetary sanctions
JEL Classification: K42
Suggested Citation: Suggested Citation