Economic theory of deterrence

Some basic issues

Abstract

The aim of the paper is to review some basic issues of the economic theory of deterrence (general prevention), using economic methods and based on the contributions in the economic theory of crime. The analysis is focused to the optimal level of deterrence and optimal composition of the deterrence components: the punishment stipulated by law and probability that this punishment will be enforced. It was demonstrated that the optimal level of deterrence is always lower than the maximum one due to its social cost, i.e. the costs of the punishment itself and costs of its enforcement, including the costs of detection of the culprit and the costs of judicial process that leads towards punishment enforcement. Due to the difference in costs function of the punishment itself and the probability of its enforcement, taking into account that the social costs of fine are negligible, optimal composition of the deterrence components is based on the maximum fine. The fine is the most efficient punishment from the economic point of view since its social costs are negligible, because it is only a welfare transfer: decrease of the culprit welfare is compensated by the increase of welfare of users of the budgetary funds or/and tax payers. The concept of the maximum fine is based on the individualized punishment and the amount of the maximum fine depends only on the culprits’ wealth: all the wealth should be expropriated. There are both theoretical (the possibility of “overdeterrence” and zero marginal punishment, since probability of the punishment enforcement cannot be differentiated between the crimes, as well as the possibility of the predatory behavior of the state, i.e. maximization of budgetary revenues as a goal rather than deterrence) and practical obstacles (the concept of human right, built into constitutional constraints to punishment, as well as limited, i.e. insufficient wealth of the culprits) to the enforcement of the maximum fine as the optimal one. Modification of that optimum is based on the consideration of the marginal punishment (fine), causality link between the magnitude of punishment and the probability of its enforcement (increased magnitude leads to the decreased probability of the sentencing), possibility of introduction of the prison sentence supplementary to the fine if the culprit’s wealth is too small, as well as relaxing the assumption about risk neutrality, presuming that rational individuals have aversion towards risk. If rational individual has aversion towards risk, increase in the probability of the punishment is more effective than the increase in magnitude of the punishment. It was demonstrated that, if the elasticity coefficient of expected punishment to its magnitude is bigger than one and if the potential culprits are risk averse, the optimal fine is smaller than the maximum one.