Economic Analysis of Public law enforcement and criminal law (part of Foundations of Economic Analysis of Law Steven shavell C2003. Steven Shavell. All Rights Reserved Chapter 20 Deterrence with Monetary Sanctions The topic addressed here is the control of undesirable acts by the state through the use, or threatened use, of monetary sanctions. That is, the general subject is the deterrence of undesirable behavior through the use of monetary sanctions In the first part of the chapter, I assume for simplicity that monetary sanctions will apply with certainty--that all parties to whom a rule should apply will be brought before social authorities and bear the intended sanctions. Then, in the second part, I assume that sanctions apply only with a probability. There I examine the use of sanctions assuming that the public must incur enforcement expense to locate and/or to convict and ultimately to penalize parties who should bear sanctions. The principal problems for society that are studied are the choice of the level of enforcement effort- which determines the probability of penalizing parties-and the choice of the magnitude of sanctions so as to maximize social welfare For convenience, I focus on the case in which parties are risk-neutral, so that parties will commit an act if the benefit to them from so doing exceeds the expected sanction. However, I also examine the case in which parties are risk-averse. In the risk-neutral case, social welfare is assumed to equal the gains parties obtain from acts, less the harm done by acts, less the costs of enforcement; in the risk-averse case the measure of social welfare also incorporates the disutility of risk-bearing. By the costs of enforcement, I mean the expenses of apprehending and convicting violators, but I assume that there is no resource cost associated with the actual imposition of monetary sanctions. This assumption is made to capture the important point that the payment of a fine is, in itself, only a transfer of purchasing pov d to expenditure of real resources. (In contrast, the imposition of the nonmonetary sanction of imprisonment involves substantial direct costs. In the next chapter, the significance of this difference will be emphasized. Of course, in fact the imposition of monetary sanctions does involve social costs, such as those involved in locating a person s assets and collecting a fine; this issue will be discussed in section 3 of chapter 22Chapter 20 – Page 1 Economic Analysis of Public Law Enforcement and Criminal Law (part of Foundations of Economic Analysis of Law) Steven Shavell ©2003. Steven Shavell. All Rights Reserved. Chapter 20 Deterrence with Monetary Sanctions The topic addressed here is the control of undesirable acts by the state through the use, or threatened use, of monetary sanctions. That is, the general subject is the deterrence of undesirable behavior through the use of monetary sanctions. In the first part of the chapter, I assume for simplicity that monetary sanctions will apply with certainty -- that all parties to whom a rule should apply will be brought before social authorities and bear the intended sanctions. Then, in the second part, I assume that sanctions apply only with a probability. There I examine the use of sanctions assuming that the public must incur enforcement expense to locate and/or to convict and ultimately to penalize parties who should bear sanctions. The principal problems for society that are studied are the choice of the level of enforcement effort – which determines the probability of penalizing parties -- and the choice of the magnitude of sanctions, so as to maximize social welfare. For convenience, I focus on the case in which parties are risk-neutral, so that parties will commit an act if the benefit to them from so doing exceeds the expected sanction. However, I also examine the case in which parties are risk-averse. In the risk-neutral case, social welfare is assumed to equal the gains parties obtain from acts, less the harm done by acts, less the costs of enforcement; in the risk-averse case the measure of social welfare also incorporates the disutility of risk-bearing. By the costs of enforcement, I mean the expenses of apprehending and convicting violators, but I assume that there is no resource cost associated with the actual imposition of monetary sanctions. This assumption is made to capture the important point that the payment of a fine is, in itself, only a transfer of purchasing power, as opposed to an expenditure of real resources.1 (In contrast, the imposition of the nonmonetary sanction of imprisonment involves substantial direct costs. In the next chapter, the significance of this difference will be emphasized.) 1 Of course, in fact the imposition of monetary sanctions does involve social costs, such as those involved in locating a person=s assets and collecting a fine; this issue will be discussed in section 3 of chapter 22