Optimal Tradeoff Between the Probability and Magnitude of Fines, The

Competition Policy and Antitrust

Article Snapshot

Author(s)

A. Mitchell Polinsky and Steven M. Shavell

Source

The American Economic Review, Vol. 69, pp. 880-891, Dec. 1979

Summary

This paper asks how high fines for wrongdoing should be set.

Policy Relevance

It is unrealistic to set fines too high. Because people want to avoid being caught, low fines and a higher probability of being caught work best.

Main Points

  • Fines for offenses such as speeding or trying to monopolize a market are set higher than amount needed to pay for the harm the offense does, to deter the harm even though not all offenders are caught.
    • Some argue that fines need to be set equal to all an offender’s assets. Setting fines so high is usually unrealistic and unnecessary.

  • When people try to avoid risk, especially if it does not cost much to make it more likely offenders will be caught, deterrence will work if fines are low and the probability of being caught is high enough.

  • When the costs of public enforcement are high (perhaps due to high wages being paid to policemen), it makes sense to choose a somewhat higher fine and a somewhat lower probability of being caught. 

  • Fines might not deter poor people who cannot pay the fine from wrongdoing.

  • Everyone would be harmed if people could buy insurance that will pay their fines.

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