The economics of crime and punishment: An analysis of optimal penalty

This paper demonstrates the optimality of a non-maximal penalty in a hierar chical enforcement structure. The penalty is chosen by the social planner t o maximize the probability of monitoring and to minimize the probability of transgression. We compare the optimal penalty levels with and without ex p ost flexibility wherein the players are allowed to alter their decision aft er they observe the social planner's choice. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification: K42; C72; K21.