The Option Value of Record-Based Sanctions

This paper offers an option value-based rationale for the consideration of non- compliance record in punishment. We study compliance decisions of a population of individuals who live for two periods, where each individual's non-compliance benefits are random and independent over time. Because increasing or decreasing sanction schemes produce different option values to current-period compliance and non-compliance, an optimal sanction scheme involves a trade-o§ between present and future compliance. This trade-o§ increases incentives for present compliance while facilitating a more efficient allocation of sanctions across periods. The optimal sanction scheme accordingly depends on the overall sanction and the distribution of non-compliance benefits.