Avoidance, Screening and Optimum Enforcement

TLDR

The literature assumes fines are costless transfers, so the cheapest way to achieve a target expected fine is to set the fine as high as possible (e.g., equal to the offender’s wealth) and adjust the probability of enforcement. Economists argue that, under the costless‑fine assumption, the optimal policy is to set fines as high as possible.

Abstract

A standard assumption in the economic literature on crime and punishment is that fines are costless transfers. Given this assumption, several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible.' The argument is a simple one. Raising the probability of a fine is costly, since it requires devoting more resources to monitoring and apprehending individuals. In contrast, raising the magnitude of a fine is costless. Therefore, the least costly way to achieve a given expected fine is to set the fine as high as possible, presumably equal to the offender's wealth, and adjust its probability so that the desired expected fine is obtained.