NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Fines and Auditing When Wealth is Costly to Observe

A. Mitchell Polinsky

NBER Working Paper No. 10760
Issued in September 2004
NBER Program(s):   LE

This article studies optimal fines when an offender's wealth is private information that can be obtained by the enforcement authority only after a costly audit. I derive the optimal fine for the underlying offense, the optimal fine for misrepresenting one's wealth level, and the optimal audit probability. I demonstrate that the optimal fine for misrepresenting wealth equals the fine for the offense divided by the audit probability, and therefore generally exceeds the fine for the offense. The optimal audit probability is positive, increases as the cost of an audit declines, and equals unity if the cost is sufficiently low. If the optimal audit probability is less than unity, there are some individuals who are capable of paying the fine for the offense who misrepresent their wealth levels. I also show that the optimal fine for the offense results in underdeterrence due to the cost of auditing wealth levels.

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Document Object Identifier (DOI): 10.3386/w10760

Published: Polinsky, A. Mitchell. "Optimal Fines and Auditing When Wealth is Costly to Observe." International Review of Law and Economics 26(3): 323-335, September 2006 citation courtesy of

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