This paper demonstrates the optimality of a non-maximal penalty in a hierarchical enforcement structure. The penalty is chosen by the social planner to maximize the probability of monitoring and to minimize the probability of transgression. We compare the optimal penalty levels with and without ex post flexibility wherein the players are allowed to alter their decision after they observe the social planner’s choice. ©2000 Elsevier Science S.A. All rights reserved.

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“The Economics of Crime and Punishment: An Analysis of Optimal Penalty,” A. Saha, G. Poole, Economics Letters, 68 (2000), 191-196