How Optimal Penalties Change with the Amount of Harm

Eric Bennett Rasmusen, Kelley School of Business, Indiana University

Abstract

Intuition tells us that the optimal penalty and court care should rise smoothly with the harm to the victim. A formal model is constructed to see if this intuition can be justified, but it appears not to be generally true: sometimes the optimal penalty and court care increase discontinuously with harm, even under reasonable assumptions on the relationship between the penalty and the amount of crime. One reason why criminal penalties are not maximal is that even if they are fines, without real costs, the efficient level of court care will still allow them to sometimes be mistakenly inflicted on the innocent.