Skip to main content
Article thumbnail
Location of Repository

Hang 'em with probability zero: Why does it not work?

By Sanjit Dhami and Ali al-Nowaihi

Abstract

Last updated 11/2006A celebrated result in the economics of crime, which we call the Becker proposition\ud (BP), states that it is optimal to impose the severest possible punishment\ud (to maintain effective deterrence) at the lowest possible probability (to economize\ud on enforcement costs). Several other applications, some unrelated to the economics\ud of crime, arise when an economic agent faces punishments/ rewards with very low\ud probabilities. For instance, insurance against low probability events, principal-agent\ud contracts that impose punitive fines, seat belt usage and the usage of mobile phones\ud among drivers etc. However, the BP, and the other applications mentioned above,\ud are at variance with the evidence. The BP has largely been considered within an\ud expected utility framework (EU). We re-examine the BP under rank dependent expected\ud utility (RDU) and prospect theory (PT). We find that the BP always holds\ud under RDU. However, under plausible scenarios within PT it does not hold, in line\ud with the evidence

Topics: Behavioral economics, Illegal activity, Expected utility theory, Rankdependent expected utility, Prospect theory, Prelec and higher order Prelec probability
Publisher: Dept. of Economics, University of Leicester
Year: 2006
OAI identifier: oai:lra.le.ac.uk:2381/7452

Suggested articles

Citations

  1. (1974). A note on income tax evasion: A theoretical analysis. doi
  2. (1973). A Note on Optimum Tax Evasion," doi
  3. (1992). Advances in prospect theory : Cumulative representation of uncertainty," doi
  4. and Sanjit Dhami (forthcoming) “A Simple Derivation of the Prelec Probability Weighting Function” doi
  5. (2004). Back to the St. Petersburg paradox? CERGE-EI working paper series
  6. (2000). Choices, values and frames (Cambridge doi
  7. (1968). Crime and Punishment: an Economic Approach, doi
  8. (2006). Cumulative prospect theory and the St. Petersburg paradox. doi
  9. (1996). Deterrence and the Death Penalty: The Views of the Experts." doi
  10. (2000). Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk. doi
  11. (1978). Disaster insurance protection: Public policy lessons,
  12. (1994). Games and Information. An Introduction to Game Theory (2nd edition).
  13. (1993). Generalized Expected Utility. doi
  14. (2006). Ian Bradley and Sanjit Dhami doi
  15. (1972). Income tax evasion: A theoretical analysis. doi
  16. (2006). Insurance and Probability Weighting Functions”, doi
  17. (2004). Microeconomics: Behavior, Institutions, and Evolution doi
  18. (1995). Myopic loss aversion and the equity premium puzzle. doi
  19. (1999). On the shape of the probability weighting function. doi
  20. (1995). Prisoner’s Dilemma, Chicken, and mixed-strategy evolutionary equilibria. doi
  21. (1979). Prospect theory : An analysis of decision under risk," doi
  22. (2000). Prospect theory in the wild: Evidence from the field. In: Kahneman D, Tversky A., Choices, values and frames,
  23. (2001). Reduction invariance and Prelec’s weighting functions. doi
  24. Sanjit and Ali al-Nowaihi (forthcoming) Why Do People Pay Taxes? Prospect Theory Versus Expected Utility Theory, doi
  25. (2005). Society for the Prevention of Accidents doi
  26. (2000). The Economic Theory of Public doi
  27. (1992). The influence of probability on risky choice: A parametric investigation. doi
  28. (1998). The probability weighting function," doi
  29. (2001). The response of criminals and noncriminals to fines” doi
  30. (2001). The response to fines and probability of detection in a series of experiments” doi
  31. (2000). The Response to Large and Small Penalties in a Natural Experiment”,
  32. (1979). The theory of the multiproduct firm under uncertainty” Australian National University, B.Ec. Honors thesis.
  33. (2004). Toward an Agenda for Behavioral Public Finance" doi
  34. (1999). Why Not Hang Them All: The Virtues of Inefficient Punishment," doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.