The Optimal Use of Fines and Imprisonment if Governments Don’t Maximize Welfare

We consider a stylized model of crime and punishment in which the prosecution policy is defined by three variables: the size of punishment, the type of punishment and the detection probability. We derive the optimal type of punishment under the assumption that the detection probability is chosen by a government whose objective function places a higher weight on the government’s budget than the social welfare function does. We show that for serious crimes exclusive imprisonment is welfare maximizing. If costs of imprisonment are taken into account, the optimal punishment is a prison term with an additional fine that is smaller or equal to the costs of the prison term. For less serious crimes, fines without imprisonment are welfare maximizing. Therefore, this paper demonstrates that the standard result of the literature that fines should be used whenever feasible need not hold in the presence of a rent-seeking government. Moreover, it offers a new explanation for the wide-spread use of mandatory imprisonment for serious crimes. JEL Classification Codes: K42, D72, H1 # I would like to thank Clive Fraser, Wolfgang Leininger, Ernst Maug, Alistair Munro, Dilip Mookherjee, Wolfram Richter, Mark Walker, and seminar participants at the University of California at Los Angeles and San Diego, the University of Dortmund, and the University of Leicester, and especially an anonymous referee for helpful discussions and comments. A previous version of this paper has been presented at the WEAI in Vancouver, the Econometric Society World Congress in Seattle and the meeting of the German Economic Association in Berlin. The first version of this paper was written while the author enjoyed the hospitality and stimulating atmosphere of the Public Sector Economic Research Centre at the University of Leicester. Financial support from the Rudolf Chaudoire Stiftung is gratefully acknowledged. * Humboldt-Universität Berlin, School of Business and Economics, Spandauer Str. 1, 10178 Berlin, Germany; e-mail: [email protected]