The effects of penalties: From theory to practice

Abstract

The purpose of this study is to provide economic analysis of penalties through the lens of Russian tendencies to increase the absolute values of fines. The work is based on the methodological approach of the new institutional economics theory and economic analysis of law. The study reveals the conceptual framework of economic analysis of penalties, analyzes the mechanisms of influence of various factors on the performance of penalties, describes various aspects of the deterrence of rules violation taking into account type II errors, investigates complex issues of the relationship between deterrence and the risk attitude of the objects of sanctions application and factors affecting the likelihood of a violation being identified. The deterrent effect of sanctions is analyzed in view of the existence of type I and type II errors. All these factors must be considered when establishing a system of penalties for a short and long term. Besides, discussion on issues of fines performance demonstrates that there are no simple solutions. In other words there is “no free lunch” in the area of enforcement mechanisms. It means that any discussion of the state of affairs or possible changes have to be accompanied by defining what is appropriated and what is lost. In particular, it is related  to correlation of types I and II errors, deterring and fiscal functions of fines. Issues of fines implementation in case of unintended damages are also discussed. The results can be used to develop policy evaluation programs for establishing and applying penalties in different areas.