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The Optimal Use of Fines and Imprisonment When Wealth is Unobservable

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  • A. Mitchell Polinsky

Abstract

This article studies the optimal use of fines and imprisonment when an offender's level of wealth is private information that cannot be observed by the enforcement authority. In a model in which there are two levels of wealth, I derive the optimal mix of sanctions, including the imprisonment sentence imposed on offenders who do not pay the fine -- referred to as the "alternative" imprisonment sentence. Among other things, I demonstrate that if imprisonment sanctions are used, the optimal alternative imprisonment sentence is sufficiently high that high-wealth individuals prefer to pay a fine exceeding the wealth level of low-wealth individuals and bear a lower (possibly no) imprisonment sentence rather than to pretend to be low-wealth individuals. I also show that if the optimal enforcement system would rely exclusively on fines when wealth is observable, the inability to observe wealth is detrimental because higher fines then could not be levied on higher-wealth individuals. In this case, it may be desirable when wealth is unobservable to impose an imprisonment sentence on offenders who do not pay the fine -- who will be low-wealth offenders -- in order to induce high-wealth offenders to pay the fine. However, if the optimal enforcement system would employ both fines and imprisonment sentences when wealth is observable, the inability to observe wealth is not detrimental. In this case, the same sanctions would be chosen if wealth is unobservable and these sanctions lead high-wealth individuals to pay more than low-wealth individuals.

Suggested Citation

  • A. Mitchell Polinsky, 2004. "The Optimal Use of Fines and Imprisonment When Wealth is Unobservable," NBER Working Papers 10761, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10761
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    References listed on IDEAS

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    1. Polinsky, A Mitchell & Shavell, Steven, 1991. "A Note on Optimal Fines When Wealth Varies among Individuals," American Economic Review, American Economic Association, vol. 81(3), pages 618-621, June.
    2. Nuno Garoupa & Hugh Gravelle, 2003. "Efficient Deterrence does not Require that the Wealthy should be Able to Buy Justice," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(3), pages 545-545, September.
    3. Chu, C. Y. Cyrus & Jiang, Neville, 1993. "Are fines more efficient than imprisonment?," Journal of Public Economics, Elsevier, vol. 51(3), pages 391-413, July.
    4. Polinsky, A. Mitchell & Shavell, Steven, 1984. "The optimal use of fines and imprisonment," Journal of Public Economics, Elsevier, vol. 24(1), pages 89-99, June.
    5. Polinsky, A. Mitchell, 2006. "Optimal fines and auditing when wealth is costly to observe," International Review of Law and Economics, Elsevier, vol. 26(3), pages 323-335, September.
    6. Levitt, Steven D., 1997. "Incentive compatibility constraints as an explanation for the use of prison sentences instead of fines," International Review of Law and Economics, Elsevier, vol. 17(2), pages 179-192, June.
    7. Lott, John R, Jr, 1987. "Should the Wealthy Be Able to "Buy Justice"?," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1307-1316, December.
    8. Garoupa, Nuno, 1998. "Optimal Law Enforcement and Imperfect Information When Wealth Varies among Individuals," Economica, London School of Economics and Political Science, vol. 65(260), pages 479-490, November.
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    Cited by:

    1. Kangoh Lee, 2017. "Norms and monetary fines as deterrents, and distributive effects," Journal of Economics, Springer, vol. 121(1), pages 1-27, May.
    2. A. Mitchell Polinsky & Steven Shavell, 2009. "Public Enforcement of Law," Chapters,in: Criminal Law and Economics, chapter 1 Edward Elgar Publishing.
    3. Florian Baumann & Tim Friehe, 2013. "Cheap Talk About The Detection Probability," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 15(01), pages 1-16.
    4. Carole Billiet & Sandra Rousseau, 2014. "How real is the threat of imprisonment for environmental crime?," European Journal of Law and Economics, Springer, vol. 37(2), pages 183-198, April.
    5. Polinsky, A. Mitchell, 2006. "Optimal fines and auditing when wealth is costly to observe," International Review of Law and Economics, Elsevier, vol. 26(3), pages 323-335, September.
    6. Bourgeon, Jean-Marc & Picard, Pierre, 2007. "Point-record driving licence and road safety: An economic approach," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 235-258, February.
    7. Bac, Mehmet, 2010. "The interaction between potential criminals' and victims' demands for guns," Journal of Public Economics, Elsevier, vol. 94(5-6), pages 337-343, June.
    8. Bac, Mehmet & Kanti Bag, Parimal, 2009. "Graduated penalty scheme," International Review of Law and Economics, Elsevier, vol. 29(4), pages 281-289, December.
    9. Dionne, Georges & Liu, Ying, 2017. "Effects of Insurance Incentives on Road Safety: Evidence from a Natural Experiment in China," Working Papers 17-1, HEC Montreal, Canada Research Chair in Risk Management.

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • K14 - Law and Economics - - Basic Areas of Law - - - Criminal Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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