Economics of Criminal Law
Inadequacy of Tort Law
• Perfect compensation may not be
possible
– Physical harms
– Limited wealth
• Tort liability protects an interest but not a
right.
– For example the law should encourage the
right of voluntary exchange.
• Perfect compensation may not deter
criminal behavior
– Some acts may go undetected.
– Repeated behaviors may exhibit
psychological commitment and call for
stronger sanctions
How criminal law differs from tort
law
1. The criminal intended to do
wrong, whereas some civil
wrongs are accidental.
2. The harm done by the criminal
was public as well as private.
3. The plaintiff is the state, not a
private individual.
4. The plaintiff has a higher
standard of proof in a criminal
trial than a civil suit.
5. If the defendant is guilty, then
he or she will be punished.
Types of crime
• Vandalism
– Intentional harm to the victim with no
material benefit to the wrongdoer
• Robbery is a welfare transfer
– Transfer of material wealth from the
victim to the criminal
– Unlike a market trade the criminal
need not value the good more highly
than the victim
– May be accompanied by emotional
or physical harm
• Regulatory or victimless crime
– Harm to the economic or social system
– Third party effects
Cost of Violence
• Violence causes approximately 50,000 deaths
each year and results in over 2.5 million injuries.
• Homicide and suicide are the second and third
leading causes of death, respectively, among
Americans aged 15-34.
• Hospital emergency departments treat an
average 55 people for injuries every minute.
• The average cost per homicide was $1.3 million
in lost productivity and $4,906 in medical costs.
• The average cost per case for a non-fatal
assault resulting in hospitalization was $57,209 in
lost productivity and $24,353 in medical costs.
Source: Center for Disease Control and Prevention
(2000 prices)
Are Criminals Rational?
• Chicago economist Steven Levitt and
Harvard sociologist Sudhir Venkatesh
studied a criminal gang in Chicago
(1991)
• Foot soldiers who sell drugs on the street
make about $3.50 an hour
• Neighborhood gang leaders can make
$65 an hour
• Gross margins for crack are 80 percent
• Talks Steven Levitt: Why do crack dealers
still live with their moms?
What crime pays
A drug gang’s monthly income statement
Revenues
Cost of drugs sold
Gross profit
During gang war
$44,500
11,300
33,200
No gang war
$58,900
12,800
46,100
Operating expenses
Wages (officers)
Wages (street pushers)
Weapons
Tribute to central gang
Mercenary fighters
Funeral expenses
Miscellaneous expenses
Total operating expenses
2,300
23,300
3,000
5,800
5,000
2,300
3,000
44,700
3,800
33,800
1,600
5,900
0
800
3,400
49,300
Other income
Dues*
Extortion
Total other income
10,000
0
10,000
10,000
8,000
18,000
($1,500)
$14,800
Net profit (loss)
*Membership
dues are paid by peripheral gang members who often
don’t sell drugs. Note: These figures are based on a 42-month period
beginning in July, 1991. Source: Levitt and Venkatesh
Relevant Question
• What acts should be considered
crimes?
• What is the optimal punishment for
a crime?
Economic Theory
• An act should be criminal if
punishing the act increases
welfare.
• Crime should be punished to the
extent it maximizes welfare.
• Retribution is not part of
economic theory
Characteristics of Criminal Law
• Criminal intent
• Public harm
• Standard of proof
Criminal intent
• Intentional harm lies
beyond recklessness
• guilty mind (mens rea)
– An intent to achieve an
illegal result
– Do mothers that kill their
babies have a guilty mind?
– First degree murder requires
premeditation
Public harm
• Crime harms the public;
therefore, the public
prosecutes.
• Victimless crimes are
possible. The victim is
society. (Gambling, drugs,
counterfeiting)
• Failed crimes can be
punished because they
cause fear.
Standard of proof
• Beyond a reasonable
doubt is a high standard of
proof
– Assumes that convicting an
innocent person is worse
than failing to convict a
guilty person.
– Keeps an onerous
government in check
Punishment
• Purposes
– Justice
– Deterrence
• Types
–
–
–
–
Corporal and capital punishment
Imprisonment
Probation
Fines
• Makes the injurer worse off,
without benefiting the victim
What acts should be punished?
• Acts should be punished when
the aim is deterrence. Acts
should be priced when aim is
internalization.
• The aim should be deterrence
when:
– Perfect compensation is impossible
– Rights are to be protected, and
not just interests
• Protection from interference, trespass
• Right to voluntary exchange
– Enforcement errors systematically
undermine liability
Economic Goal of Criminal Law
• Criminal law should
minimize the social cost of
crime, which is equal to
the sum of the harm it
causes and the costs of
preventing it.
– Should the criminal’s benefit
be included in the analysis?
– Marginal social cost of
prevention = marginal social
benefit of prevention
Optimal Deterrence
Crime and Punishment
• Seriousness of punishment
should be positively related
to seriousness of offense
• Punishment becomes more
server as crime becomes
more serious
Embezzlement
Mathematics of Rational Crime
•
•
•
•
•
f = punishment
x= seriousness of crime
y= payoff
Max y(x) - p(x)f(x)
Solution
y’ = p’f + pf’
Criminals marginal benefit =
criminals marginal expected
cost of punishment
Why not apply the maximum
penalty for minor crimes?
• The cost of applying the
penalty may not be worth
it
• There is nothing to deter
one from committing a
major crime after they
have committed a minor
crime
Optimal Means of Deterrence
• Choice between enforcement
and punishment
• Socially optimal combination is the
one that costs less for a given level
of deterrence
• High fines and low probability of
punishment can yield the same
expected value as low fines and
high probability of punishment
– Assuming ability to pay high fines
would be optimal
Gary Becker - Are Criminals Risk
Adverse?
• Gary Becker
– Expected utility will differ from
expected value when the criminal
is risk adverse or a risk taker
• For risk takers increase in p
would reduce the expected
utility, and thus the number of
offenses, more than an equal
percentage increase in f
• For risk averters an increase in f
would have the greater than
an equal percentage increase
in p
David Friedman – Why do we
imprison anyone?
• Bullets and rope are cheap, so
the total cost of an execution
consists almost entirely of the
cost paid by the criminal-his life
o Whenever a criminal receives a
life sentence, we flip a coin.
Heads he goes free; tails we
hang him
o The severity of the crime can
determine the probability of
death
What’s wrong with this
proposition?
• Nothing, if the objective is
efficiency
• Other considerations
– Its irreversible
– We may be reluctant to use
it because it is too efficient
– Governments may abuse the
system (Germany)
Deterrence Hypothesis
• Increase in expected punishment
causes a significant decrease in
crime
• Supply of crime is elastic with
respect to punishment
• Alternative view is that criminals
do not weigh benefits and costs
• Economic opportunities should
reduce crime
Economics of Prison Time
• The present value of future
year in prison declines as
the sentence increases.
• One additional policemen
is equal to the cost of
about 3 years in prison.
• Is three strikes and your out
efficient?
– Mandatory extended
sentence for three serious
criminal offenses
Optimal Sentencing
• Longer sentences deter
crime, increase prison costs
and reduce other social
costs
• Optimal sentence should
depend on marginal
benefit and marginal cost
Crack Cocaine vs. Power Cocaine
•
•
•
•
•
Mandatory minimum of 5 years in prison for possession of 5 grams of crack
cocaine, the approximate weight of two pennies
Controlling for like amounts of cocaine, in 2000, crack defendants convicted of
trafficking in less than 25 grams of cocaine received an average sentence that
was 4.8 times longer than the sentence received by equivalent powder
defendant. The ratio between average crack and powder sentences for
defendants convicted of trafficking in between 15 and 49.9 kilograms of cocaine
was 2.4:1.
For defendants with the lowest criminal histories, the ratio between average
crack and powder sentences for the lowest amounts of drug 8.3:1.
The average sentence for trafficking in cocaine powder in the year 2000 was 74
months; the median sentence was 57 months. For crack cocaine traffickers, the
average sentence was 117 months; the median sentence was 96 months."
Characteristics of users
–
–
–
–
Crack defendants were also twice as likely to carry a weapon
Crack cocaine defendants were more likely than cocaine powder defendants to have a
criminal history.
Reductions in crack offense penalties would primarily affect Black defendants.
Source: U.S. Department of Justice
Economics of Ethnic Profiling
• Would profiling exist in an
efficient system of justice?
• How should the optimal level of
profiling be determined?
• Should efficiency be the
objective?
• Profiling that lacks a scientific
basis is likely to waste resources
• May want to restrict analysis to
cases in which there is rational
foundation
A Marginal Analysis
x = dollars of search activity
C = dollar benefit to society of an apprehension
p( x )  probabilit y of apprehensi on
p( x)  0, p( x)  0
max p ( x)C  x
p( x)C  1
A Marginal Analysis
Optimal level of search activity is where
the marginal cost of search is equal to the
marginal benefit of apprehension
With market segmentation of criminals
p( xA )C  p( xB )C  1
A dollar spent in each market segment
should provide the same marginal benefit
With market segmentation
• If an additional dollar of
expenditure on searching A
creates a larger marginal
increase in apprehension, then
less search expenditures on B
and more on A.
• Marginal increase in probability
of apprehension should be
identical.
• Does not mean that
– Probability of apprehension on
both communities will be equal.
– Total expenditures on search costs
in both communities will be equal.
Profiling Example
Separate Communities
Group A
Group B
Total Population
100
Estimated number of criminals
50
Cost of a search
$1
Expected cost of apprehension
$2
Combined Community
100
10
$1
$10
Total Population
Estimated number of criminals
200
60
Expected cost of apprehension from random
searches
$3.33
Profiling Considerations
• If searches of one group become more
efficient with experience there may be a
tendency to concentrate resources on that
group
• Profiling based on a taste for discrimination
increases apprehension costs
• What if the selection characteristics are in
control of the profiled group? (dress)
• The costs of profiling are concentrated on the
profiled group
 pay each innocent person we search (Airports,
drug stops, DWI stops)
 Moral hazard