Posner's "economical" theory of punishment

Wednesday, September 20, 2006

The Becker-Posner blog has recently discussed punishment measures for "Identity Theft". According to Prof. Posner:
The economic theory of punishment teaches that, at least as a first approximation, the expected cost of the fine or other punishment for crime should just exceed the expected gain to the criminal from committing the crime, in order to make it worthless to him.

The expected value of a 100 percent probability of incurring a cost of $100 is $100, but so is the expected value of a 1 percent probability of incurring a cost of $10,000 ($100 = .01 X $10,000). If the probability of apprehending and punishing an identity thief is very low, the punishment will have to be jacked up very high in order to deter. Suppose an identity thief who sends out 100,000 "phishing" emails (impersonating persons or firms who would have a legitimate need for access to the recipient's personal identifying information) anticipates a $10,000 profit. If the probability that he will be caught and punished for his fraud is 1 percent, then a fine slightly in excess of $1 million would be necessary to deter him. Probably he could not pay such a fine, and so a prison sentence would have to be substituted, designed to impose the equivalent disutility on him.
It is interesting to see how economical approach could be used in punishment theory. However, critics says that this kind of punishment method sees human as nothing but numbers. I wonder what will happen if someone impersonates Bill Gates. Will the perpetrator gets 1,000 year imprisonment?

Nevertheless, I think the theory could be applied for nanotechnology policy, after they are adjusted. As Stiglitz's "information assymetry" said, price sometimes lies. In an information society, price lies quite a lot. Until economic theorist managed to correctly attribute price to information, we'll have to wait using Posner's theory.