ELSEVI ER Incentive Compatibility Constraints as an Explanation for the Use of Prison Sentences Instead of Fines

In s tandard models of opt imal de te r rence , which assume perfect in format ion on the par t of the social p lanner , fines domina te ja i l sentences as an ins t rument for pun ish ing crime. In the real world, however, pun i shmen t using prisons is quite common. This pape r provides an explanat ion for that empir ical observation. If cr iminals e i ther have private in format ion about their own wealth, or have a substantial por t ion of their wealth in the form of h u m a n capital, the social p l anne r canno t simply impose a fine on a criminal , who can always claim to have insufficient wealth to pay the fine. Rather, because of the need for incentive compatibil i ty, it is as if the social p l anne r offers the cr iminal a choice: e i ther pay the fine or go to jail. That addi t ional const ra int on the social p l anne r dramatical ly reduces the effectiveness of fines vis-a-vis a perfect informat ion world. Mandatory sentencing guidel ines exacerbate the p rob lems associated with incentive compatibi l i ty by restr ict ing a j udge ' s ability to tai lor penal t ies to individual criminals. © 1997 by Elsevier Science Inc.