Massimo D'Antoni (Università di Siena)
Tim Friehe (University of Marburg)
Avraham Tabbach (Tel-Aviv University)
This paper studies the optimal use of fines and imprisonment when wealth is heterogeneous among individuals and it may or may not be observable. When wealth is observable, for a given offender type, the fine is set to the maximum level (i.e., wealth) and the imprisonment term is either maximal or zero under general conditions. Fines and imprisonment often act as complements, meaning that maximal (zero) imprisonment is utilized for individuals with high (low) fine levels. As a result, the total sanction is often escalating with wealth. When wealth is unobservable, the optimal punishment structure changes drastically. To induce high-wealth individuals to pay higher fines and refrain from pretending to be low-wealth individuals, the total sanction must be weakly decreasing with wealth. Thus, low-wealth individuals will face higher total sanctions possibly including maximal imprisonment, while high-wealth individuals will face lower total sanctions possibly excluding imprisonment and less than maximal fines. In all cases, the inability to observe wealth lowers social welfare.