In what ever the prison system or judicial system, what ever the powers you're hoping they will have, Expect players to take advantage of it, not for dueling justice out. I don't like the idea of prisons, in the least, it would take a huge number of people to run effectively. For the most part, it isn't there to make the game more fun for deviant play-style it would just be there to be a detremement as a whole for player enjoyment.
Having the ability to work off your prison sentence, it's just forced labor for those that don't want to pay as much for the game. Death is natural own up to your mistakes. Don't try to just have a either shortened sentence by making prisons able to be escaped. Or just have people do remedial labor for their crimes. Which would then again, have to be enforced by players and NPCs which would be a new form of indentured servitude.
That's what this is, is a way to extend your playtime with your character, and no deviant would want to have a shorter lifespan, IF that means that they can still build attributes one way or another. Every action in this game rewards a player with experience, even if they don't get the product of their labor. Which probably wouldn't be the case because they are likely working on public projects, not private ones. They would just be doing what a functioning domain would normally be doing trying to make something out of their character. In this case they can say they chizzled that block of stone really nicely for that wall the count wants. (This would drive down the price for the masons unable to compete with prison labor, if people actually chose prison labor as an option.) You can't compete with free, this outprices any of the guilds that would be in the industry of making bricks, nails, generally anything that could have a person stay in one spot and craft the whole time. That's why I am against intendured servitude and/or prison labor.
While I get a great deal, other people will not be able to compete with me in the price I can get for making a building then selling it. So this isn't good for the economics of the game, generally.
So even if it was a good looking option. I am not for it just so a few players save a couple dollars on a huge mistake.