It is a form of godmodding, surely, and that's because it's a rather simple mechanism put in place before real and complex features are there. It tries to compensate the lawlessness abuses and, as could be expected, overcompensates. So, to me, it's not about mechanics that don't make sense towards roleplay, it's just roleplaying in an unfinished game. In short, it can't be fair until it's done.
For criminals to be able to play and have fun while in jail, that requires a proper jail map, which is not a short term task.
For players involvement however, a feature that could be added before the proper implementation of law enforcement, and still could integrate with it, is to flag criminals automatically on a guards' signal, like a Mark of Infamy spell, and to put them constantly hittable by anyone, until they get killed, or maybe even longer: until they get jailed. Then anybody could raise a posse...
That would be better if ways of capturing people were available, like spells or special weapons. Or give a Jail Teleportation Rod to players through quests and factions points, a rod that works only on players that wear this mark of infamy. The rods could also be limited to work inside city limits; a different rod per city.
With more features added, you could then have players arresting players in cities, for duty, and bounty hunters chasing them outside, for material rewards.
