Optimal deterrence under misperception of the probability of apprehension and the magnitude of sanctions

A standard result in the literature is that agents may be incentivized to obey socially optimal regulations by modulating either the probability of apprehension or the sanction once apprehended. Several studies investigate the conditions under which agents may be relatively more sensitive to increases in the probability as opposed to increases in the sanction. These studies assume agents have perfect information regarding one or both of the probability and the sanction. Yet, other studies show that agents routinely misperceive both the objective probabilities and the sanctions they face. This paper weaves several studies into a general model that enables theoretical exploration of unidimensional and multidimensional misperception upon deterrence policy. In turn, the theoretical model supports policy applications in a wide range of legal contexts beyond criminal, property, and torts, such as energy, health, and intellectual property, where agent compliance may be undermined by misperceptions.