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Penalty mechanism design

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  • Pu-yan Nie

    (Jinan University)

Abstract

Penalty is a crucial approach to maintain society in order in both the legal and the political philosophies. How to establish a rational and efficient penalty mechanism is exceedingly important in practice in economics and politics and this paper explores the optimal mechanism design of penalty. A penalty under monopoly mechanism design theory is established and developed in this piece of work. By establishing the penalty mechanism design model, this paper finds that stricter punishment can efficiently deter violation of the regulations but can decrease the profits of the monopoly firm at the same time. Furthermore, penalty increases the concavity of the monopoly firm’s profit function, which makes it easier for the firm to make decisions and which means strict penalty results in optimal decisions. We also show that punishment is in general costly, which is highly consistent with the phenomena in practice.

Suggested Citation

  • Pu-yan Nie, 2014. "Penalty mechanism design," Computational and Mathematical Organization Theory, Springer, vol. 20(4), pages 417-429, December.
    • Handle: RePEc:spr:comaot:v:20:y:2014:i:4:d:10.1007_s10588-013-9172-z
    DOI: 10.1007/s10588-013-9172-z
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    References listed on IDEAS

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    Cited by:

    1. Gedion Onyango, 2019. "Organizational Disciplinary Actions as Socio-Political Processes in Public Organizations," Public Organization Review, Springer, vol. 19(2), pages 227-248, June.
    2. Nie, Pu-yan & Wang, Chan & Yang, Yong-cong, 2019. "Vertical integration maintenance commitments," Journal of Retailing and Consumer Services, Elsevier, vol. 47(C), pages 11-16.

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