We study the design of enforcement mechanisms when enforcement resources are chosen ex ante and are inelastic ex post. Multiple equilibria arise naturally. We identify a new answer to the old question of why non-maximal penalties are used to punish moderate actions: "marginal" penalties are much more attractive in the Pareto inferior crime wave equilibrium. Specifically, although marginal penalties have both costs and benefits, the net benefit is strictly positive in the crime wave equilibrium. In contrast, marginal penalties frequently have a net cost in the noncrime wave equilibrium. We also show that increasing enforcement resources may worsen crime.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)