Penalty lottery*

• Published date: 01 October 2023
• Author: Duk Gyoo Kim
• Date: 01 October 2023
• DOI: http://doi.org/10.1111/sjoe.12528

Scand. J. of Economics 125(4), 997–1026, 2023

DOI: 10.1111/sjoe.12528

Penalty lottery*

Duk Gyoo Kim

Sungkyunkwan University, 03063 Seoul, South Korea

kim.dukgyoo@skku.edu

Abstract

To control sequential public bad productions under imperfect monitoring, this paper proposes a

penalty lottery: a violator passes the responsibility of the f‌ine to the next potential violator with

some probability and pays all the accumulated f‌ines with the complementary probability. The

penalty lottery does not merely impose extreme f‌ines because an absorbing state is practically

unreachable. It self-selects people more willing to produce public bads and endogenously

imposes the larger expected f‌ines on them. It has advantages over the day-f‌ine system in which

the f‌ine depends on the offender’s daily income. Experimental evidence is consistent with the

proposed theoretical predictions.

Keywords: Institutional change; public bads; misdemeanors; imperfect monitoring; laboratory

experiments

JEL classif‌ication:C91; D81; K42

1. Introduction

Tickets issued for misdemeanors are a multi-billion industry. More than ten

million citations for parking violations were issued during the f‌iscal year

2017 in New York City.1The minimum f‌ine is $35, so the parking tickets

alone generate a revenue of at least $378 million. If that number represents the

social costs incurred by the negative externalities of wrongdoing, it is natural

to consider the proper way to minimize misdemeanors. A day-f‌ine system, in

which a unit of f‌ine payment is based on the offender’s daily personal income,

is employed in some countries, and it has been considered an alternative to

*I thank Andrzej Baranski, Antoine Camous, Yongmin Chen, Hans Peter Gr¨

uner, Randi

Hjalmarsson, Harim Kim, Sang-Hyun Kim, Jinhyuk Lee, Joosung Lee, Zvika Neeman, Nicola

Persico, Euncheol Shin, Kathryn E. Spier, Thomas Tr¨

oger, Leeat Yariv, Sangjun Ye, Minchul

Yum, Galina Zudenkova, seminar participants at the University of Mannheim, Yonsei University,

Korea University, Seoul National University, and Sungkyunkwan University, and conference

participants in the 35th meeting of the European Association of Law and Economics, the 13th

Nordic Conference on Behavioral and Experimental Economics, the 2019 Asia-Pacif‌ic Meeting

of the Economic Science Association, HeiKaMaX Workshop, and Reading Experimental and

Behavioral Economics Workshop for their helpful comments.

1Source: NYC OpenData, Parking Violations Issued - Fiscal Year 2017, https://data.

cityofnewyork.us/City-Government/Parking-Violations-Issued-Fiscal-Year-2017/2bnn-yakx.

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or utgivande av the SJE.

998 Penalty lottery

f‌ixed f‌ines (Hillsman, 1990). Several news media outlets have covered the

day-f‌ine system in Finland.2However, it is still debatable whether the wealth

level – a factor not directly related to the offending action – justif‌ies the

different f‌ines for the same wrongdoing and whether it would prevent the

misdemeanors of the poor.3It is not always possible to implement spending

more resources to enhance public monitoring, such as hiring more police

off‌icers. Increasing the f‌ine might not be justif‌iable for multiple reasons. If a

f‌ine is precisely determined at the level to correct the negative externality of

wrongdoing (Becker, 1968), there are no grounds for increasing the f‌ine. Even

so, if a local government enforces exceptionally severe penalties to eradicate

all incidences of public bads, this leads to distorted incentives on the margin

(Stigler, 1970). If, for example, every misdemeanor results in a substantial

f‌ine, so the punishment for littering is almost the same as for burglary, then

a person willing to litter might also be willing to break into a building. As

discussed later, another potential issue of the unilateral f‌ine increase is that

it deters the actions of citizens with low willingness to produce public bads,

while citizens with high willingness remain undeterred.

Given that the fundamental reason for prohibiting a misdemeanor is that

it produces a public bad, a broader goal is to seek eff‌icient ways to reduce

an individual’s sequential public bad production under imperfect monitoring.

Although the motivating example is parking violations, any problem of bad

uses of common resources is also relevant to the broader goal. The primary

purpose of this paper is to propose a simple institutional change that helps us to

attain this goal, which, herein, is called a “penalty lottery”. A violator, a citizen

who produced a public bad for their own sake and was monitored, passes over

and accumulates the f‌ine for the next violator with some probability 𝑞, and that

person pays all of the accumulated f‌ines with probability 1 −𝑞. The standard

rule of the game is nested as a special case with 𝑞=0. This institutional change

involves neither a change in the public monitoring capacity nor an increase in

the nominal f‌ine, but it could reduce the number of public bad producers in

the long run. Even in a situation where every individual citizen initially f‌inds

public bad production benef‌icial, this penalty lottery asymptotically prevents

2See the articles, “Speeding in Finland can cost a fortune, if you already have one”,

by S. Daley, 25 April 2015, in the New York Times (https://www.nytimes.com/2015/

04/26/world/europe/speeding-in-f‌inland-can-cost-a-fortune-if-you-already-have-one.html), and

“Finland, home of the $103,000 speeding ticket”, by J. Pinsker, 12 March 2015, in The Atlantic

(https://www.theatlantic.com/business/archive/2015/03/f‌inland-home-of-the-103000-speeding-

ticket/387484/).

3Another practical issue is how the income level can be transparently measured: the fact that a

day-f‌ine system is currently employed in countries where the degree of public tax transparency

is high suggests that establishing a high level of public tax transparency might be the f‌irst-order

requirement for implementing a day-f‌ine system.

c

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oreningen f¨

or utgivande av the SJE.