INCENTIVE COMPATIBILITY CONSTRAINTS AS AN EXPLANATION FOR THE USE OF PRISON SENTENCES INSTEAD OF FINES

In standard models of optimal deterrence, which assume perfect informa tion on the part of the social planner, fines dominate jail sentences as an instrument for punishing crime. In the real world, however, puni shment using prisons is quite common. This paper provides an explanati on for that empirical observation. If criminals either have private in formation about their own wealth, or have a substantial portion of the ir wealth in the form of human capital, the social planner cannot simp ly impose a fine on a criminal, who can always claim to have insuffici ent wealth to pay the fine; Rather, because of the need for incentive compatibility, it is as if the social planner offers the criminal a ch oice: either pay the fine or go to jail. That additional constraint on the social planner dramatically reduces the effectiveness of fines vi s-a-vis a perfect information world. Mandatory sentencing guidelines e xacerbate the problems associated with incentive compatibility by rest ricting a judge's ability to tailor penalties to individual criminals. (C) 1997 by Elsevier Science Inc.