Econ 522 – Lecture 23 (Dec 4 2007)
(Much of today’s lecture comes from chapter 15 of the Friedman book, which is now online as a digital reserve.)
The next two lectures will be on criminal law.
Like with the legal process for civil law, the economic goal of criminal law is to minimize the total social cost of crimes, plus the resources that are spent on enforcing the system (detecting and punishing offenses).
Everything we’ve done so far has been about civil cases. In civil cases, a suit is brought by an individual who was harmed; in most cases, if the plaintiff prevails, the remedy is meant to compensate him for the harm that occurred.
Criminal law differs from civil law in a number of ways:

The criminal intended to do wrong. (In many civil cases, the harm was accidental.)

The case is brought by the government, not an individual

The harm done was public as well as private.

The standard of proof is higher than in a civil suit

If found guilty, the defendant will be punished
The first distinction is that a criminal conviction requires intent. The legal term is mens rea
, “a guilty mind”. In tort law, we considered harms that happened accidentally. An injurer might cause an accident while taking precautions, and still been liable under a strict liability rule. An injurer might cause an accident while not taking sufficient precautions, and been liable under a negligence rule. An injurer might cause an accident while being reckless, and been liable for punitive damages on top of compensatory damages. But in any of these cases, the injurer did not intend for the harm to occur.
(There are circumstances where the line of intent gets blurred. If someone is in a position of responsibility for someone else’s safety and, through a pattern of negligence, causes that person’s death, they can be charged with “criminally negligent homicide” even though they did not intend for the person to die. The flip side of this: sometimes intent is enough, as when people are charged with attempted murder even though no actual harm occurred.)

In civil law, a case is brought by the victim. In criminal law, a case is brought by the state. Recall that in tort cases involving accidental death, the victim could never receive damages; his family and friends could only sue for lost companionship or lost wages, not the lost life. Criminal cases do not require a living victim.
This also allows prosecution of “victimless crimes” – that is, crimes which do not cause any clear harm, such as gambling, prostitution, and drug sales.
The theory here is that all crimes harm the public – that is, the breakdown of law and order in society is a public bad. Thus, the public (represented by the state) brings criminal actions, not the victim.
As we’ve mentioned earlier, in most civil cases, the standard of proof is a preponderance of the evidence. In criminal cases, the prosecution must prove its case beyond a reasonable doubt. We’ll come back to this.
Finally, the distinction between civil remedies and “punishment.”
In nuisance law, contract law, and tort law, damages are paid both to compensate the victim and to cause the injurer to internalize the cost of the harm: so that pollution, breach of contract, and accidents will only happen when they are efficient, that is, when they are less costly than preventing them.
In criminal law, punishment is not meant to compensate the victim directly, and need not be limited to the magnitude of the harm done. Civil remedies generally transfer resources from one party to another, without destroying anything; criminal punishments, such as prison time and execution, often destroy resources, that is, they are designed to make the criminal worse off without necessarily making anyone else better off.
Another way to put it is that civil penalties are designed to make injurers internalize the costs of their harms, so that these harms only occur when they are efficient; criminal punishments are designed to deter crimes, to discourage their commission in all situations.

This begs an interesting question: are crimes ever efficient
? Cooter and Ulen don’t seem to take much of a stand. (They ask the question, “which acts should be treated as crimes?” and give the rather unsatisfactory answer, “an act should be treated as a crime if doing so increases social welfare.”) Friedman clearly believes some are.
Clearly, most crimes are inefficient. In order to steal my laptop out of my car, someone might have to break my window. The laptop has lots of personal stuff on it – papers I’m working on, pictures of my friends – it’s probably worth more to me than to him. Plus, he broke my window. So the cost to me is likely larger than the benefit to the thief.
Similarly, stolen cars are worth much less than legally-owned cars. If someone steals my car, he’ll probably sell it for much less than it will cost me to replace it. Plus, he may have to reduce the value of the car to steal it – by breaking a window, jamming a screwdriver in the ignition, etc. Again, the crime is inefficient.
And if a crime were efficient – say, someone stealing my car because they value it much more than me – there is often a legal alternative – offering to buy the car from me.
However, Friedman gives a couple of examples of efficient crimes. One is a situation we saw earlier: a hiker is lost in the woods, on the brink of starvation, and stumbles on a cabin with nobody home. He breaks into the cabin and steals some food.
(In this case, we have a legal doctrine to deal with the problem: private necessity. Rather than paying the penalty for trespass, breaking and entering, and theft, the “criminal” would likely just be liable for the damage done.)
Friedman gives a creepier example: efficient murder. A very rich man decides he would derive a huge amount of pleasure from hunting and killing a human being. He finds ten people who all agree that he can pay them each $1,000,000, they’ll draw straws, and he can hunt and kill whoever draws the shortest straw. Since the transaction is voluntary, it seems like it must be efficient.
In fact, there’s a recent case that sounds more like this than you’d expect. In 2001, a
German man, Armin Meiwes, posted an ad online “looking for a well-built 18-to-30year-old to be slaughtered and consumed.” Seriously. And someone answered. The two met, discussed it, and agreed that Meiwes would kill and eat the guy. (This would fulfill various fantasies that both men had.) So he did. And videotaped it. Some of the details of the story are gruesome, I won’t share them.
In 2002, Meiwes was arrested, and admitted to what he had done. At the time, cannibalism was not a crime in Germany, so the question was primarily whether someone could be guilty of murdering someone who consented.
In 2004, Meiwes was convicted of manslaughter and sentenced to 8 and a half years in prison. In 2005, he was ordered retried, and in 2006, convicted of murder and sentenced to life in prison.

So again, if the rich guy and his ten greedy friends all consent to the hunting contract, or
Meiwes and his victim agree that he should be killed and eaten, are these crimes efficient? It depends on how much you buy into the externalities idea – that certain actions are so repugnant they harm others just by their stench.
We’ll come back to the question of efficient crimes in a bit. For the most part, though, it’s probably safe to assume most crimes are inefficient.
We saw that tort law can create an incentive to avoid certain harms. If tort law worked perfectly, there might be no need for separate criminal law.
The book offers three reasons that tort law is inadequate to deal with certain types of offenses.
First, tort law depends on perfect compensation; but perfect compensation may be impossible, as in cases of the loss of a life or a crippling injury.
Second, even if perfect compensation is possible in principle, it may be impossible in practice. A court has no good way to figure out how much money would make me indifferent about losing my left arm. There’s no clear market substitute. If they ask me, I have an incentive to lie.
(Recall a long time back, when we distinguished between injunction/property protection and damages/liability protection. We can recast this as the distinction between protecting a right and protecting an interest . If someone is free to cut off my arm, provided they pay me for it, then my interest in that arm is protected; but my right to have that arm is not. The book tries to make the case that in certain instances, it is better to protect rights than interests.)
Third, if the probability of getting caught and convicted is less than one, then to deter the act, the punishment must be more severe than the benefit received. We made this argument with punitive damages; the problem is even greater with deliberate acts. (If anyone caught stealing money was simply required to return it, we would expect this to lead to an awful lot of theft.)

Cooter and Ulen argue that an economic theory of crime and punishment must answer two questions:
 which acts should be punished?
 how should they be punished?
They answer the first question: acts should be punished when the aim is deterrence, acts should be priced when the aim is internalization. And the aim should be deterrence when perfect compensation is impossible, when people want law to protect rights instead of interests, or when enforcement errors undermine liability.
I’m not wild about the treatment in chapter 11 of the textbook – it feels like they introduce a bunch of math for the sake of the math, in a way that doesn’t give any additional insight. The rest of today is basically the treatment in the Friedman book.

The basic economic model of crime and punishment makes the following key assumption: rational criminals.
That is, we assume that potential criminals consider the costs of a crime – the chance of getting caught, and the severity of punishment – and weigh it against the benefits they get.
If enforcement were free, we could hire so many police that nearly all crimes were detected, and punish them severely; this would lead to nobody rational ever committing any crime. Obviously, the reason we don’t do this is enforcement costs.
In order to deter crime, we have to do two things: catch offenders, and punish them.
Catching a higher fraction of criminals is more costly: it takes more police officers, more detectives, and so on.
More severe punishment also tends to be more expensive. The most common punishments are fines and imprisonment. Fines aren’t costly at all – the offender pays
$1000, the state receives $1000, the total social cost of the punishment is 0. However, fines don’t always work, because not everyone can pay them. Suppose there was a crime we wanted to deter by imposing a punishment equal to a $100,000 fine. A lot of the people who commit the crime may not have $100,000, so they would not face a sufficient deterrent.
So when fines are not sufficient, we have to turn to less efficient means of punishment, such as imprisonment. This clearly has a social cost: going to jail makes the offender worse off (as planned), but it also makes the state worse off, since it has to build the jail, staff it, and so on. So imprisonment is inefficient. Most punishments (aside from fines) are inefficient.

This solves a problem posed by Gary Becker, in the paper (on the syllabus) that launched the modern economic literature on criminal law. Suppose we had a crime that was punished by a 20% chance of being caught and convicted and a punishment equivalent to
$20,000. What would happen if we fired half the police and judges, so the chance of being caught and convicted dropped to 10%; but we raised the punishment to $40,000.
Punishing someone to the extent of $40,000 might be more costly than punishing them to the extent of $20,000. But it wouldn’t be more than twice as costly. And there’d be half as many people we needed to punish. So the costs of punishment would be the same or lower. On the other hand, we’d save money on detection/apprehension. So we’d get the same expected punishment – and therefore the same deterrence effect – at a lower cost.
Repeating the same argument over and over, Becker concluded that the optimal criminal system was a infinitely low probability of an infinitely severe punishment.
For a bit, think only about expected punishment, that is, probability X punishment.
We argued before that increasing the expected punishment of a crime – by increasing the chance of being caught, or the severity of punishment – is more costly on a per-crime basis. However, as we increase the expected punishment, this creates a stronger deterrence effect, which decreases the number of offenders we have to detect and punish. Which means that the total cost of administering this punishment might go down.
(Or might go up.)
So the marginal cost of deterring another crime could be positive or negative.
(For an example of how this works, suppose that at some cost, we could come up with a punishment so severe that nobody would ever commit the crime. Then we would never have to impose the punishment, and never have to solve any crimes, so the cost of deterrence would be very low.)
This brings us to a rather elegant theory of optimal punishment.
Friedman motivates it with an example.
Suppose there is some crime for which the expected punishment is initially set at $900.
That is, every time the crime occurs, the offender is subject to a “lottery” – a chance of being caught, and a punishment if convicted – which he values as much as a $900 fine imposed with certainty. Suppose we figured out that raising the expected punishment from $900 to $901 would deter one more crime. Should we do it?

That depends on whether the social cost of raising the expected punishment from $900 to
$901 is greater or less than the social cost of that marginal crime.
Suppose that raising the expected punishment from $900 to $901 costs $50 more. (We argued that it could increase or decrease total costs; suppose here that it increases them.)
And suppose that the marginal crime does $1000 worth of damage to people besides the offender.
Since we want to consider total social costs, we also have to consider the benefit the offender got from the crime. (This may sound funny – we’ll come back to it in a bit.)
How much value does the offender get from the marginal crime? The crime we’re deterring is the one that would have been committed when the expected punishment was
$900, but will not be committed when the expected punishment is $901. So the value of this crime to the criminal must be between $900 and $901.
So in this case, the social cost of the marginal crime is $1000 – 900 = 100, and the cost of deterring it is $50 – we can prevent a net loss of $100 at a cost of $50, so we should do it.
Now, more generally, if we are deterring the optimal amount of crime, it must be true that the net damage of one more crime is equal to the marginal cost to deter one more crime:
Cost of deterring one more crime = Net damage
By definition, net damage is the damage to the victim, minus the benefit to the offender, so
Cost of deterring one more crime = Damage to Victim – Benefit to Offender
We said that on the margin, the last crime we deter will be the one whose benefit to the offender is exactly equal to the expected punishment, so
Cost of deterring one more crime = Damage to Victim – Expected Punishment
Rearranging,
Expected Punishment = Damage to Victim – Marginal Cost of Deterrence

So this tells us three things:

When deterrence is free, expected punishment should equal damage to victim – this causes the offender to internalize the costs of his actions, leading to only efficient crimes, just like in civil cases

When the marginal cost of deterrence is positive – when raising expected punishment to deter one more crime is costly – expected punishment should be less than damage to victim. That is, when preventing the marginal crime is costly, we allow all efficient crimes, and some slightly inefficient crimes, because preventing them would cost too much

When the marginal cost of deterrence is negative – when raising expected punishment lowers costs, since there are fewer crimes to punish – expected punishment should be greater than damage to victim. That is, when preventing the marginal crime saves money, we aim to deter all inefficient crimes, and even some efficient crimes, because deterring them is cheaper than punishing them
It might seem odd that we continue to count the criminal’s costs and benefits when calculating social costs. That is, we said that fines cost nothing – they make the offender worse off, and the state the same amount better off – rather than saying, screw the offender, fines generate revenue for the state. Similarly, in calculating the social cost of a crime, we included the benefit to the offender, even allowing for the possibility of some crimes being efficient.
You could argue that by committing certain acts, offenders basically give up their right to be counted.
But Friedman argues it this way. We’re looking for an economic theory of why things like murder and embezzlement should be treated differently than things like nuisances, breach of contract or torts. If we start out by assuming they’re morally different – that someone breaching a good-faith contract remains a part of society, but someone embezzling his employer’s money has crossed a line and no longer counts – then we’re basically assuming the answer to our question. If we can avoid making assumptions like that, just start with the idea of economic efficiency and still come up with arguments for why these actions should be treated differently, then we’ve actually proven something.
How comfortable you are counting the offender’s benefit may also depend on the type of crime. You might be very willing to concede that if someone breaks your car window to steal $50, the social cost of the crime is just the cost of the window. You might be less comfortable with the idea that the social cost of a crime like murder or rape should include the utility the offender got from committing the act.

Stigma
We said that fines have no social cost, and most other punishments – jail, execution – have significant social costs. Friedman points out one type of punishment that has a negative social cost, that is, that actually creates value.
Suppose you’re a pretty good corporate treasurer, and one day, you get caught embezzling money from your employer. One consequence is you go to jail for a year.
Another consequence is that when you get out, you find it hard to get another job as a corporate treasurer. Your punishment consisted of both jail time and a stigma, that is, other peoples’ knowledge of your crime.
Friedman points out two empirical studies by John Lott. One studied white-collar criminals, and found that the lost income following conviction was a significant fraction of the punishment. Another looked at corporations charged with cheating their customers, and found that the drop in stock value was many times larger than whatever actual punishment was imposed.
Friedman points out that stigma as a punishment actually has negative social cost. To show this, he considers the following experiment. First, get caught embezzling and go to jail. Next, go interview for jobs. Tell people that you’re well-qualified to be a corporate treasurer, but you recognize they may be hesitant to hire a convicted embezzler, so you’re willing to work for much less than the going rate.
Friedman predicts that there’s no price at which most firms would knowingly take on an embezzler as treasurer. That is, the cost to them of hiring you (at any wage) is greater than the value to you of having the job. This means that you getting hired by that firm would be inefficient. Without the conviction, you might have gotten the job; with the conviction, you don’t. So society is better off with you being known to be an embezzler.
(The information that you are the type of person who embezzles is valuable to society.)
Friedman points out that stigma has one other funny characteristic: as a punishment, it’s efficient when applied to a guilty person, but very inefficient when applied to an innocent person. (That is, if someone who’s not an embezzler gets convicted of embezzlement, they may not get any jobs in the future, but this is inefficient.) This is one argument for why criminal cases, which tend to come with a social stigma, should carry a higher standard of proof than civil cases, which come with no stigma.

Friedman describes a great back-and-forth between him and some of his students, on the question of whether the rich should face higher fines than the poor for the same offense.
His argument was that fines should be the same for everyone. A particular offense imposes some amount of external damage. Setting punishment equal to damage leads to efficient choices, by both rich and poor.
John Lott made a similar argument a different way. Most crimes are punished by imprisonment. The rich value their time more highly than the poor, so imprisonment may be a more severe punishment to the rich than to the poor. But on the other hand, the rich, on average, have better lawyers, so they get convicted with lower probability; the two effects might balance, so the same punishments might be appropriate.
Friedman’s students, though, pointed out that there are two different types of crimes: those with monetary benefits for the offender, and those with nonmonetary benefits.
First, consider stealing $100. This has the same monetary benefit to someone rich or someone poor. So a penalty with the same monetary equivalent – say, a $1000 fine – would have the same deterrent effect on the rich or the poor.
But second, consider the joy of punching someone in the face who looked at you funny in a bar. Suppose this has the same utility benefit for both the rich and the poor. Because the rich have a lower marginal utility of money, it would take a larger fine to have the same deterrent effect.
But things get even more complicated. Remember that with costly enforcement, the goal is not to deter all crimes, but to deter most crimes – that is, deter crimes until it stops being worth it to deter the next one. Friedman apparently had his students work through some examples. Sometimes, it’s optimal to set fines to deter “most” poor peoples’ crimes and “most” rich peoples’ crimes – which involves setting higher fines for rich people.
But if deterring the rich is too costly, it’s sometimes optimal to deter poor peoples’ crimes and accept that the rich will do what they want!
(Friedman gives two more complications, which could favor either higher or lower punishments for rich people.)

This brings us to another important point: sometimes, society may have other goals in mind besides efficiency. We’ve been using efficiency as our proxy for goodness throughout this course. But it might be that in criminal cases, society puts a high value on treating everyone the same, even if this doesn’t lead to the most efficient outcomes.
People might not object too heavily if rich people were charged higher fines than poor people for similar crimes. People would probably object very strenuously if poor people were given more severe punishments than rich people for similar offenses.
That is, society might put a high value on “equality before the law,” and be willing to sacrifice some efficiency to get it.
One example of this: certain crimes are often punished by a choice between a fine and jail time. These tend to put a fairly low dollar equivalent to time in jail – for instance, you might be sentenced to a $5,000 fine or a year in jail. The disutility of a lost year is pretty large – the likely result of this is that everyone who can afford the fine will pay it, and everyone who can’t will go to jail. But this means that rich offenders pay a small fine they can easily afford, and poor offenders spend a year in jail, which may seem objectionable.
(In fact, since fines have a much smaller social cost than imprisonment, it may be preferable to push people toward paying fines rather than jail time, so a rule like this may make sense. But it still may seem objectionable to some people.)
A few more things. First of all, we said that imprisonment has a high social cost, because it’s costly to the offender and costly to the state. However, we overlooked one benefit: while someone is locked up, they can’t commit more crimes. That is, if someone is a habitual offender, society benefits from having them locked up. This is referred to as incapacitation .
In fact, there’s a problem in much of the empirical literature on whether stronger punishments actually deter crime, which is that it’s hard to separate the deterrence effect from the incapacitation effect. That is, if you catch more criminals and lock them up for longer, it may deter crime because people are more afraid of getting caught; and it also may lower crime because a bunch of criminals are locked up; and it’s sometimes hard to tell which is the dominant effect.

(Another argument for imprisonment is that it gives us a chance to rehabilitate people, that is, to turn them from criminals back into productive members of society.)
One simplification we’ve been making is that we’re only considering one crime at a time.
If different crimes are substitutes for each other, increasing the punishment on one may push offenders into committing the other crime instead.
Take the example of armed robbery, and armed robbery plus murder. You break into an isolated house, carrying a gun, intending to steal stuff. Someone hears you and wakes up.
What do you do?
If the punishment for armed robbery is much less severe than the punishment for murder, you might choose to run – take your chances on the owner calling the police and being able to identify you, knowing that at least the punishment won’t be that drastic if you’re caught. If the punishment for armed robbery is very high, you might be better off shooting the guy, reducing the chance of getting caught, knowing the punishment won’t be that different if you are.
This argument has been used to argue against “three strikes” rules, which mandate long
(20 years or more) prison terms for third convictions on certain types of crimes. If someone is about to get caught for a relatively minor offense, facing a very severe punishment might make them more willing to kill someone to avoid being caught.
(Richmond gun control law.)

Not surprisingly, there’s empirical evidence that harsher expected punishments do have some deterrent effect. However, the results are interesting: on the margin, crime levels seem to respond more to changes in the probability of getting caught, than to changes in the magnitude of the punishment.
That is, doubling the chance of being caught has more of an effect on crime rates than doubling the fine or the prison term that convicted offenders will face.
Friedman gives a simple argument for why this isn’t surprising: if the total private cost of being punished is actually greater than the “apparent” sentence. If someone is convicted and sentenced to 1 year in jail, they likely already spent some time in jail awaiting trial, spent money on a lawyer, and will have to live with the stigma of being a convicted criminal. These additional penalties are similar in magnitude regardless of the length of the prison sentence; so
20% X (1 year + C) > 10% X (2 years + C) not because 20% of 1 year is worse than 10% of two years, but because 20% of C is greater than 10% of C.
This empirical fact – that people respond more to the probability of getting caught than to the sentence – argues against Becker’s conclusion, which was that the optimal system was very harsh punishments with very low probabilities.
(Also, working against Becker is the fact that society may have moral qualms about punishments which are massively out of proportion with offenses, such as executing jaywalkers.)

We already discussed the fact that using fines as a punishment mechanism has very little social cost, and are likely the most desirable punishment for offenders who can afford to pay the fine.
For those who cannot, imprisonment is costly, but could be made less costly by having prisoners do useful work. This has happened in many places in the past. (I remember hearing the irony a long time ago that New Hampshire license plates are stamped by prisoners, but bear the state motto, “Live Free or Die”.)
Finally, given the excess demand for transplantable organs, execution could be made less costly for society (maybe even given a negative cost) by taking executed criminals’ organs for transplant.
Pulling it all together, Friedman gives a somewhat shocking hypothetical vision of what an efficient criminal system might look like:
It would be designed to squeeze the largest possible fines out of convicted criminals, using the threat of more unpleasant alternatives for those who failed to pay. If the fines that victims can pay, even under such threats, are inadequate, they are supplemented by penal slavery for criminals who can produce more than it costs to guard and feed them, execution with the organs forfeiting to the state for those who cannot. Any prisons that do exist and do not pay for themselves are as unpleasant as possible, so as to produce as much punishment as possible per dollar of imprisonment cost. It is a consistent picture, and considerable parts of it can be found in the not very distant past, but not a pretty one.
He considers a few counterarguments. Incapacitation and rehabilitation might favor prison over fines, but would not necessitate such unpleasant prisons. Execution is very costly in the current system, due to extra legal protections, which may seem necessary because of its irreversibility and the horror of executing an innocent person. And some elements of this may just seem wrong to people – forced labor, or confiscation of body parts.
Friedman, however, offers another argument against “efficient” punishments. As punishments get more efficient, this means the state gets greater and greater benefits from punishing people; which gives a large incentive for abuse. Already, some people feel far too much police effort goes into drug cases – in which forfeiture of dealers’ money and possessions is common – over other crimes that do not come with this “bonus.” We’ve been pretending the “state” is some perfect, benevolent institution, but in truth it consists of lots of individuals who respond to incentives; making imprisonment and execution too profitable for the state would lead to very creepy incentives.

Finally, Friedman argues that the same logic may explain criminal laws against some
“victimless” crimes – cannibalism (once someone is dead), organ sales, and so on.
In a world where cannibalism is allowed, the private benefit of murder is higher; so murder might be more common. Even more so with organ sales – once human organs become valuable commodities, the value of killing someone becomes much higher, and may outweigh the risk of punishment. Thus, it may make sense to outlaw certain practices that do no harm in and of themselves, but encourage other harms.
(One might be able to make a similar case for illegal drugs, although I’m not sure the case would be any stronger than with alcohol.)
Cooter and Ulen offer a model of “youthful indiscretion”-type crimes which are committed during “lapses”, that is, temporary deviations from rationality which the offender would later regret. Take a look if you like.
Cooter and Ulen also estimate the total social cost of crime to be on the order of $500 billion annually in the United States.
Thursday, we’ll pick up with some empirical stuff on crime.