Optimal Judicial Sentencing and the Fair Trading Act 1986 - A study of the size of penalties awarded under section 40 of the New Zealand Fair Trading Act 1986

Abstract

The purpose of this study is to investigate the determinants of the size of penalties awarded by the courts under the Fair Trading Act 1986. The law and economics theory of optimal penalties provides the theoretical framework. This is used to develop a theory of optimal judicial sentencing based on the assumption that similar "optimality considerations" operate at both legislative and judicial levels.The factors judges take into account in sentencing in Fair Trading Act cases as disclosed in their written decisions are quantified and used to approximate the optimality considerations. In this manner features specific to the Fair Trading Act environment are accommodated. Using a sample of Fair Trading Act cases econometric analysis is employed to test whether the theory developed in this study is in fact capable of explaining differences in the sizes of the penalties imposed by the courts. While it is beyond the scope of this study to decidewhether the individual penalties that have been imposed are optimal an assessment is made about the extent to which optimality considerations explain the average variation in the size of penalties.The study found that optimality considerations do explain some but not all of the variation in the size of penalties. In particular four variables -whether the defendant intended to breach the Act whether the defendant had previously breached the Fair Trading Act whether the defendant is able to pay a large fine and whether the defendant cooperated with the Commerce Commission in its inquiry - were shown to have a statistically significant impact on the size of the penalty.The study suggests that there is reasonable degree of consistency of judicial sentencing under the Fair Trading Act.