I like the idea of jails. As an additional option when you get caught by the guards...

It would have to be made as public dungeon kind of area, with two ways out - work off your bounty by doing -a lot- of boring repetetive "jail work" tasks like crushing rocks to gravel or sewing jute sacks or something of the sort, (and they should be something you'd have to do by hand, not something you can just let some bot do for you) or find a way to escape, which would add to your bounty instead.
Hmmm... or even have a friend come and pay your bounty to get you out...

In the jail you would of course have no access to your gear, and get a stylish black-and-white striped threadbare prison uniform instead (which would make a neat costume unlock you can get once you get out, one way or another), and recovering your stuff would have to be part of any jailbreak questline... (You'd get it back automatically on release if you decide to do your time and work off your bounty)

There also would be jail-clichee miniquests, from brawls in the recreation area to stabbing attempts in the dinin hall to soap dropping in the showers...

And there might be several possible "escape" quests you could attempt, from the classic tunnel idea to climbing the wall in the night, each with their chance of failure (which of course still would add the escape penalty to your bounty, and thus your time in jail), possibly dependent on how well you execute your plan... I could see a questline with multiple options for each step, each adding to the success chance depending on what option you choose (choose one way to distract the guards and your success chance increases by 5%, choose another wy and it rises by 20%, choose one item for a task and it goes up by 10%, choose another and it only goes up by 5%, that sort of thing...), and some other ways to influence the final outcome (pick the lock on the first try and your chan ces go up 20%, need a second try and they go down 10%, finish that maze part in under a minute and they go up 10%, take too long and they go waaay down...)

And of course once we get a barbershop, jail achievements could unlock new exclusive "jail tatoo" body markings... I mentioned the costume already, there could be a title or two as well...

So many possibilities!

That makes no sense at all. If you get caught, your stolen stuff gets confiscated, period. You'd think they let you smuggle anything into prison that easily? Just look at RL prisons... they check any prisoner -very- closely. Much more closely then you'd like... -insert rubber glove joke here-
Smart thieves don't rack up a bounty if they can help it, and dash to the outlaw refugee to sell/launder if they luck upon something purple.

The jail idea would have to be an entirely optional third choice between "pay fine or flee/fight"... and give people access to a bunch of repeatable "prisontime" miniquests that would drop expees on completion to work on that next c-point while also paying off your bounty... and of course add another piece of flavor to the game.

And naturally there is more that could be done with an "prison island"... not just the encounters, "do time" miniquests, and the "escape" questlines, but there could be a lot more... how about a hidden prison subbasement dungeons? (remember, still no gear...)