Optimal Enforcement with Heterogeneous Private Costs of Punishment

We formalize the idea that regulatory devices may generate different incentive effects for different individuals. These unequal incentive effects can generate social costs by causing some individuals to be overdeterred and others to be underdeterred. This is an underappreciated dimension over which one ought to compare the efficiency of various regulatory tools. We then note various methods to reduce inefficiencies caused by unequal incentive effects.

Among others, we show that combining tools that have negatively related effects can improve welfare, increasing the probability of detection can be preferable to imposing large transferable sanctions, and regulators should incur real costs to be able to make more extensive use of unvarying instruments.