An economic approach to deterring foreign exchange offenses: Evidence from Madagascar

Abstract

This paper discusses the economic approach to deterring foreign exchange violations in the context of law enforcement in Madagascar. In order to find an optimal level of monetary sanction, the setting of the fine rate applied is based on one or more well-defined criteria such as the seriousness of the exchange infraction. According to the economic literature on law enforcement, the penalty achieves a level of intended deterrence if it is greater than or at least equal to the benefit expected by the offender. Inspired by this idea, we propose a new approach so that if the benefit obtained by the offender is not observable, the fine should at least equal the expected benefit, and if the benefit is observable, the fine should equal the observed benefit. In the case of foreign exchange violations, the proposed fine rate is the rate of irregularity committed by the economic agent, which should be flexible and dynamic. The results show that the firm with a high rate of irregularity has an incentive to respect the regulation more because the fine rate applied is high. At a certain level, it respects the law until the amount of the fine is tolerable. Finally, a firm with a low rate of irregularity is deterred from keeping this rate relatively low to avoid being fined by the high rate of fine.