The Optimal Use of Fines and Imprisonment Revisited

We study the optimal use of fines and imprisonment when wealth varies across individuals and may be observable or not. When wealth is observable, the optimal total sanction includes the maximum fine and either zero or maximum imprisonment. Imprisonment often complements the fine, therefore the total sanction increases with wealth. However, with unobservable wealth, total sanctions must weakly decrease with wealth to satisfy incentive compatibility constraints. The total sanction for low-wealth individuals may include maximum imprisonment, while high-wealth individuals may face no imprisonment and often less than maximum fines. The inability to observe wealth aligns policy prescriptions with actual enforcement policy and lowers social welfare.