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The Optimal Use of Fines and Imprisonment when Wealth is Unobservable

  • A. Mitchell Polinsky

    (Stanford University and National Bureau of Economic Research)

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.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 03-037.

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Date of creation: Aug 2004
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Handle: RePEc:sip:dpaper:03-037
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  1. 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.
  2. 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 1307-16, December.
  3. A. Mitchell Polinsky & Steven Shavell, 1990. "A Note on Optimal Fines When Wealth Varies Among Individuals," NBER Working Papers 3232, National Bureau of Economic Research, Inc.
  4. 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-, September.
  5. A. Mitchell Polinsky, 2004. "Optimal Fines and Auditing When Wealth is Costly to Observe," Discussion Papers 03-038, Stanford Institute for Economic Policy Research.
  6. 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 479-90, November.
  7. 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.
  8. 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.
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