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The Optimal Probability and Magnitude of Fines for Acts that Definitely are Undesirable

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  • Louis Kaplow

Abstract

Even when society would wish to deter all acts of some type, such as tax evasion and many common crimes, the benefits from deterrence often will be insufficient to justify the expenditures on enforcement that would be required to deter everyone. If some individuals are not deterred, however, they will bear risk when fines are employed as a sanction. As a result, it may be optimal to reduce total risk-bearing costs by reducing the number of individuals who bear any risk. This can be accomplished by increasing enforcement above the level that would be justified considering only the benefits of deterrence and the direct costs of enforcement. Another possibility is that it may be optimal reduce the risk borne by those who act, by employing fines below the maximum feasible level. This latter result constitutes an instance in which the well-known implication of Becker's analysis that it is optimal to employ extreme sanctions for all offenses is invalid.

Suggested Citation

  • Louis Kaplow, 1989. "The Optimal Probability and Magnitude of Fines for Acts that Definitely are Undesirable," NBER Working Papers 3008, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3008
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    1. 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.
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    Cited by:

    1. Polinsky, A. Mitchell & Shavell, Steven, 2007. "The Theory of Public Enforcement of Law," Handbook of Law and Economics, Elsevier.
    2. Kaplow, Louis & Shavell, Steven, 1994. "Accuracy in the Determination of Liability," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 1-15, April.
    3. Dhami, Sanjit & al-Nowaihi, Ali, 2013. "An extension of the Becker proposition to non-expected utility theory," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 10-20.
    4. A. Mitchell Polinsky & Steven Shavell, 2009. "Public Enforcement of Law," Chapters,in: Criminal Law and Economics, chapter 1 Edward Elgar Publishing.
    5. K. Forslind, 2007. "The economics of environmental law enforcement: end-of-life vehicles," European Journal of Law and Economics, Springer, vol. 23(3), pages 223-236, June.
    6. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
    7. 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.
    8. BRYAN C. McCANNON, 2009. "Differentiating Between First And Repeat Offenses," Contemporary Economic Policy, Western Economic Association International, vol. 27(1), pages 76-85, January.
    9. Marceau, Nicolas, 1997. "Self-selection and violence in the market for crime," International Review of Law and Economics, Elsevier, vol. 17(2), pages 193-201, June.
    10. Dominique Demougin & Claude Fluet, 1999. "Costly Sanctions and the Maximum Penalty Principle," Cahiers de recherche CREFE / CREFE Working Papers 100, CREFE, Université du Québec à Montréal.
    11. Garoupa, Nuno, 2001. "Optimal magnitude and probability of fines," European Economic Review, Elsevier, vol. 45(9), pages 1765-1771, October.
    12. Insaf Bekir & Sana El Harbi & Gilles Grolleau, 2012. "The strategy of raising counterfeiters’ costs in luxury markets," European Journal of Law and Economics, Springer, vol. 33(3), pages 645-661, June.
    13. Polinsky, A. Mitchell & Shavell, Steven, 2001. "Corruption and optimal law enforcement," Journal of Public Economics, Elsevier, vol. 81(1), pages 1-24, July.
    14. Alfred Endres & Bianca Rundshagen, 2012. "Escalating penalties: a supergame approach," Economics of Governance, Springer, vol. 13(1), pages 29-49, March.
    15. Matteo Rizzolli & Margherita Saraceno, 2009. "Better that X guilty persons escape than that one innocent suffer," Working Papers 168, University of Milano-Bicocca, Department of Economics, revised Jul 2009.
    16. Forest, Adam & Kirchler, Erich, 2010. "Targeting occupations with varying reputations to increase tax revenue," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(3), pages 400-406, June.
    17. 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.

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