This paper re-examines the literature on optimal penalties and the allocation of resources to enforcement from the viewpoint of incentive theory. It is assumed that an agent might perform a socially harmful act. In contrast to previous analyses, the agent might also perform profit-enhancing...

Using an agency model of firm behavior, the paper analyzes whether the cost of investment should be tax exempt. The findings suggest that, when managers engage in wasteful capital expenditures, welfare may decline if the cost of investment is tax deductible, as commonly advocated. The extent to...