A general equilibrium model of crime and punishment

Sse Efi Working Paper Series in Economics and Finance, 2005

We analyze the interplay between economic incentives and social norms when individuals decide whether or not to engage in criminal activity. More specifically, we assume that there is a social norm against criminal activity and that deviations from the norm result in feelings of guilt or shame. The intensity of these feelings is here endogenous in the sense that they are stronger when the population fraction obeying the norm is larger. As a consequence, a gradual reduction of the sanctions against criminal activity, or of the taxation of legal incomes, may weaken the social norm against crime. Due to the potential multiplicity of equilibria in our model, such a gradual change may even induce a discontinuous increase in the crime rate. We show that law enforcement policies may have dramatic and permanent effects on the crime rate, and lead to hysteresis. We also define political equilibrium under majority rule and show how a majority of individuals, who feel no guilt or shame from violating the law, in political equilibrium can exploit a minority who do have such feelings.

The Journal of Legal Studies, 2003

This paper incorporates the theory of the taxation of risk taking into an economic model of income-producing crimes and examines the deterrent effects of different income tax rules. 1 In particular, the paper explores the deterrent effects of taxing legal and illegal income and of the tax treatment of monetary and nonmonetary sanctions. The key insight is that taxation may, in addition to changing the relative expected returns from legal and criminal activities, affect the riskiness of crime and the willingness to bear risk. For example, taxing returns and allowing deductions for sanctions reduces the risk associated with crime. Taxing income also, however, reduces individuals' wealth and may in general reduce their willingness to assume risk. The net effect of taxation may lead to some surprising results. For example, taxing legal and exempting criminal activities may not necessarily result in more crime. Similarly, taxing both legal work and crime but disallowing deductions for fines does not unambiguously lower crime. Additionally, allowing deductions for fines may lead to more crime. If punishment takes the form of imprisonment, the tax system reduces the * John M. Olin Scholar in Law and Economics University of Chicago. I would like to thank William Landes and David Weisbach for many discussions and comments on an earlier draft of this paper. I also thank the John M. Olin Foundation for financial assistance. 1 This paper heavily draws on the public finance literature on taxation and risk taking.

Economie Appliquee, 2001

I consider a general speci cation of criminals' objective function and argue that, when the general non-expected utility theory is substituted for the traditional expected utility theory, the high-ne-lowprobability result Becker, 1968 only holds under speci c and strong restrictions.

1997

In this paper, we d e v elop a general equilibrium model of crime and show that law enforcement has di erent roles depending on the equilibrium characterization and the value of social norms. When an economy has a unique stable equilibrium where a fraction of the population is productive and the remaining predates, the government can choose an optimal law enforcement policy to maximize a welfare function evaluated at that steady state. If such steady state is not unique, law enforcement i s s t i l l r e l e v ant but in a completely di erent way because the steady state that prevails depends on the initial proportions of productive and predator individuals in the economy. The relative importance of these proportions can be changed through law enforcement policy.

Foundations and Trends® in Microeconomics, 2006

This paper starts with a review the economics of criminal behavior. Then, the authors discuss the theory of public enforcement. The economic analysis of criminal behavior and criminal law has been a hugely successful enterprise. As an academic enterprise, it has achieved the goal of research-it has generated a large and growing literature. More important than academic success, however, has been the influence of this branch of learning on actual practice. The understanding of deterrence effects and rational responses by criminals has substantially changed the purpose and functioning of the criminal justice system.

Review of Law & Economics, 2013

This article studies the effects of income taxation on enforcement of business regulations. The key result is that income taxation makes it less socially costly to enforce the law and therefore allows the attainment of a higher level of deterrence. The explanation for this result is that income taxation reduces the gains businesses derive from violating the law, but it does not affect, at least not to the same extent, the feasible fine. This result is true, regardless of whether fines are deductible for tax purposes or not, as long as the probability and magnitude of fines optimally reflect tax rules and tax rates, as this article argues they should do. However, if the probability and magnitude of fines do not change in response to income tax changes, disallowing deductions for fines, which is the prevailing tax rule in many jurisdictions, is socially desirable for sufficiently low tax rates or tax rate changes.

Discrete and Continuous Dynamical Systems - Series S, 2010

Criminals are common to all societies. To fight against them the community takes different security measures as, for example, to bring about a police. Thus, crime causes a depletion of the common wealth not only by criminal acts but also because the cost of hiring a police force. In this paper, we present a mathematical model of a criminal-prone self-protected society that is divided into socio-economical classes. We study the effect of a non-null crime rate on a free-of-criminals society which is taken as a reference system. As a consequence, we define a criminal-prone society as one whose free-ofcriminals steady state is unstable under small perturbations of a certain socioeconomical context. Finally, we compare two alternative strategies to control crime: (i) enhancing police efficiency, either by enlarging its size or by updating its technology, against (ii) either reducing criminal appealing or promoting social classes at risk.

SSRN Electronic Journal, 2008

This paper explores how the distribution of wealth affects the social costs of crime and law enforcement and whether more or less equality, in this regard, is socially desirable. Generally, the optimal distribution of wealth should balance the social costs of enforcing the law upon wealthy individuals and those costs vis-à-vis poor individuals. The paper shows that, in a broad set of circumstances, greater or even perfect equality in the distribution of wealth is socially desirable. This is the case even though, as is assumed, the distribution of the benefits and harms resulting from harmful acts are the same for all individuals, all of whom also have identical and linear utility functions. However, there are certain circumstances under which inequality is socially preferable, circumstances that, all other things equal, are more likely to arise in poorer societies.

2002

There has been much discussion of the relationships between crime, inequality and unemployment. We construct a model where all three are endogenous. Introducing crime into otherwise standard models affects the labor market in several interesting ways. For example, we show how the crime rate affects the unemployment rate and vice-versa; how the possibility of criminal activity can lead to wage inequality among homogeneous workers; and how the possibility of crime can generate multiple equilibria in natural but previously unexplored ways. In particular, two fundamentally identical neighborhoods may easily end up with different levels of unemployment, inequality, and crime. The model can be used to study the equilibrium effects of anti-crime policies, such as changes in apprehension rates or jail sentences, as well as more traditional labor market policies such unemployment insurance. * We thank particpants in several seminars and conferences, especially James Albrecht and Hugo Hopenhayn, for their comments and suggestions. Lagos thanks STICERD and Wright the NSF for Þnancial support. The usual disclaimer applies.