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Costly Sanctions and the Maximum Penalty Principle

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We study the problem of deterring undesirable behavior in a moral hazard framework with risk averse individuals, noisy information and costly sanctions. We find that, if sanctions are a pure loss, a utilitarian society should use a bang-bang penalty scheme satisfying the maximum penalty principle. If sanctions are monetary but imposing sanctions involves a sufficiently large resource cost, the maximum feasible sanction should also be imposed with positive probability. As a possible justification for endogenously limiting sanctions, we derive the optimal penalty scheme under a Rawlsian welfare function. The maximum sanction actually imposed is then smaller than in the utilitarian case, but it is imposed more frequently. Cet article analyse le problème de la dissuasion des comportemenmts indésirables dans un contexte d'aléa moral avec aversion au risque, information imparfaite et coûts de sanction. Nous montrons que, si les sanctions imposées aux individus sont une pure perte sociale, la politique utilitariste optimale consiste à utiliser un mécanisme de sanction dichotomique satisfaisant le principe de la sanction maximale. Si les sanctions sont pécuniaires mais qu'imposer des sanctions implique un coût en ressource suffisamment élevé, la sanction maximale permise devrait également être imposée avec une probabilité positive. Comme justification possible de sanctions limitées, nous analysons la politique de dissuasion optimale avec une fonction de bien-être rawlsienne. Le sanction maximale est dans ce cas inférieure à celle d'une politique utilitariste, mais elle est imposée plus fréquemment.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 100.

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Length: 24 pages
Date of creation: Dec 1999
Date of revision:
Handle: RePEc:cre:crefwp:100

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Keywords: Deterrence; optimal enforcement; moral hazard; maximal penalty; Rawl's criterion;

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  1. Ehrlich, Isaac, 1982. "The optimum enforcement of laws and the concept of justice: A positive analysis," International Review of Law and Economics, Elsevier, vol. 2(1), pages 3-27, June.
  2. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
  3. Claude Fluet & Dominique Demougin, 2001. "Ranking of information systems in agency models: an integral condition," Economic Theory, Springer, vol. 17(2), pages 489-496.
  4. Boadway, R. & Marceau, N. & Marchand, M., 1993. "Time-Consistent Criminal Sanctions," Papers 9318, Laval - Recherche en Politique Economique.
  5. Garoupa, Nuno, 1997. " The Theory of Optimal Law Enforcement," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 267-95, September.
  6. A. Mitchell Polinsky & Steven Shavell, 1993. "Enforcement Costs and the Optimal Magnitude and Probability of Fines," NBER Working Papers 3429, National Bureau of Economic Research, Inc.
  7. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  8. Louis Kaplow & Steven Shavell, 1994. "Accuracy in the Determination of Liability," NBER Working Papers 4203, National Bureau of Economic Research, Inc.
  9. Louis Kaplow, 1992. "The Optimal Probability and Magnitude of Fines for Acts that Definitely are Undesirable," NBER Working Papers 3008, National Bureau of Economic Research, Inc.
  10. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, vol. 69(5), pages 880-91, December.
  11. Kaplow, Louis, 1990. "A note on the optimal use of nonmonetary sanctions," Journal of Public Economics, Elsevier, vol. 42(2), pages 245-247, July.
  12. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  13. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
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Cited by:
  1. David Masclet, 2003. "L'analyse de l'influence de la pression des pairs dans les équipes de travail," CIRANO Working Papers 2003s-35, CIRANO.

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