Costly Sanctions and the Maximum Penalty Principle

Dominique Demougin () and Claude Fluet

No 100, Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal

Abstract: We study the problem of deterring undesirable behavior in a moral hazard framework with risk averse individuals, noisy information and costly sanctions. We find that, if sanctions are a pure loss, a utilitarian society should use a bang-bang penalty scheme satisfying the maximum penalty principle. If sanctions are monetary but imposing sanctions involves a sufficiently large resource cost, the maximum feasible sanction should also be imposed with positive probability. As a possible justification for endogenously limiting sanctions, we derive the optimal penalty scheme under a Rawlsian welfare function. The maximum sanction actually imposed is then smaller than in the utilitarian case, but it is imposed more frequently.

Cet article analyse le problème de la dissuasion des comportemenmts indésirables dans un contexte d'aléa moral avec aversion au risque, information imparfaite et coûts de sanction. Nous montrons que, si les sanctions imposées aux individus sont une pure perte sociale, la politique utilitariste optimale consiste à utiliser un mécanisme de sanction dichotomique satisfaisant le principe de la sanction maximale. Si les sanctions sont pécuniaires mais qu'imposer des sanctions implique un coût en ressource suffisamment élevé, la sanction maximale permise devrait également être imposée avec une probabilité positive. Comme justification possible de sanctions limitées, nous analysons la politique de dissuasion optimale avec une fonction de bien-être rawlsienne. Le sanction maximale est dans ce cas inférieure à celle d'une politique utilitariste, mais elle est imposée plus fréquemment.

Keywords: Deterrence; optimal enforcement; moral hazard; maximal penalty; Rawl's criterion (search for similar items in EconPapers)
JEL-codes: D8 K1 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1999-12
New Economics Papers: this item is included in nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.unites.uqam.ca/eco/CREFE/cahiers/cah100.pdf Main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (http://www.unites.uqam.ca/eco/CREFE/cahiers/cah100.pdf [301 Moved Permanently]--> https://unites.uqam.ca/eco/CREFE/cahiers/cah100.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cre:crefwp:100

Access Statistics for this paper

More papers in Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal P.O. Box 8888, Downtown Station, Montreal (Canada) Quebec, H3C 3P8. Contact information at EDIRC.
Bibliographic data for series maintained by Stéphane Pallage ().