In early 2012, I wrote a post titled “Speeding Fines that Vary with Income: Absolute vs. Relative Risk Aversion and Public Policy,” about income-proportional speeding tickets.
In light of the best evidence on the relationship between risk preferences and income–which essentially finds that as people get wealthier, they care less and less about gambling over a fixed dollar amount (say, $200), but their aversion to gambling a fixed fraction of their income or wealth (say, 1% of their income)–I explained that instead of fining people a fixed dollar amount for speeding, we should fine them a proportion of their income. In practice, this could be done by using a person’s declared income for the last year by checking with the IRS or with the department of revenue in the state where a person gets fined. In my post, I wrote:
Under a vast number of circumstances, even if absolute risk aversion A(w) decreases as w increases, relative risk aversion R(w) will increase as w increases. This means that when speeding fines are proportions of a driver’s income (e.g., you pay 5 percent of your income if you are caught speeding) rather than absolute dollar amounts (e.g., you pay $250 if you are caught speeding).
More importantly, this also suggests that courts could — and, if you take the distinction between absolute and relative risk aversion seriously, should — impose damages proportional to the defendant’s income rather than fixed damages when deciding how much a defendant should compensate a plaintiff for a loss or injury.
We often hear that the problem with the Internet is that whatever you post on it lives on forever. While that might be a problem if you post pictures of your drunken antics on Instagram, the fact that the stuff you post on the Internet lives forever can be great for academic bloggers.
Last week, as I was sitting at MSP waiting on a delayed flight to Washington, DC, I received an email from the Atlantic‘s Joe Pinsker, who had found my post after looking around for information about income-proportional fines, and who asked me some specific questions about how such a system might or might not work.
So over our MSP-DCA flight, I reviewed the evidence on risk preferences and typed up my answers to Joe’s questions. Here is the article that came out of it in the Atlantic:
But at least when it comes to discouraging the wealthy from breaking the law, day-fines could be effective, says Marc Bellemare, a professor of applied economics at the University of Minnesota. “When considering a proportion of their income…people are at least constantly risk-averse. This means that the worst that would happen is that the deterrent effect of fines would be the same across wealth or income levels,” he says.
He doesn’t think the American system should be revamped overnight, but thinks that day-fines could hold promise. “We should start small—say, only speeding tickets—and see what happens,” he says. Now that America is no longer of the “lock ‘em up” mentality, day-fines should get another shot.
Cool article (though I am not sure America has completely done away with the “lock’em up” mentality…)