ESNIE 2004
The Economics of Law
Enforcement
Nuno Garoupa
Universidade Nova de Lisboa
CEPR, London
OVERVIEW OF LECTURE
1.
2.
Introduction
Public Nature of Law
Enforcement
1.
2.
3.
3.
General Structure of Law
Enforcement
1.
2.
3.
4.
4.
Private vs. Public
Criminal vs. Tort
Joint Methods of Legal
Intervention
Special Case of
Corporations
Comparative Aspects of
Law Enforcement
1.
5.
Basic Theory
Recent Developments
Other Goals of Law
Enforcement
2.
Administration of Law
Enforcement
Institutional Analysis
Concluding Remarks
INTRODUCTION
Economics of Law Enforcement
• Economics
– Individual Behavior: Microeconomics
– Normative Approach: Welfare Economics
• Law
– Role and Goals of Law
– Content of Law
– Structure of Law: Private vs. Public
• Enforcement
– Certainty vs. Severity
– Institutional Arrangements
INTRODUCTION
Literature
• Foundations: The Classical Theory
– Hobbes (1588-1869), Rosseau (1712-1778), Locke
(1632-1704): social contract; inalienable rights
– Cesare Beccaria (1738-1794)
– Jeremy Bentham (1748-1832)
• The Modern Rational Theory
– James Q. Wilson, Thinking About Crime (1975)
– Clarke and Cornish, introduce limited rationality
(1987)
– Cohen and Felson, Routine Activities Theory (1979)
• The Economic Theory
– Becker (1968, JPE)
– Work by Polinsky and Shavell
Introduction
Individual
Behavior
-Illegal gains
-Costs of breaking
the law
-Rational behavior
-“Born to be Bad”
Law
Enforcement
-Goals
-Sanctions
-Resources
-Organization of
Justice System
Social Behavior
-Social Contract
-Political Economy
Law
-Content
-Completeness
-Institutions
-Tort vs. Crime
-Administrative
BASIC MODEL
• Individuals compare:
– Benefits
• Illegal Gain
• Other Gains
(Psychological,
Biological,…)
– Costs
• Expected Punishment
• Social Costs: Stigma
• Other Costs
(Psychological)
• Decision to offend is
the rational outcome
of comparing costs
and benefits
BASIC MODEL
• Objective of law enforcement:
DETERRENCE.
• Why?: Externality (social harm or
social damage)
• How?: Internalize externality
• Policy instruments:
– Sanction: Fine;
– Resources devoted to punishment:
Probability;
• Market Approach to Law
Enforcement:
– Is there a market for offenses?
– Is a sanction really a price?
• Price approach
• Pigou taxation approach
THE MULTIPLIER PRINCIPLE
Sanction=Harm/Probability
HARM=€100
PROBABILITY SANCTION
1
100
0.5
200
0.1
1000
0.01
10000
0.001
100000
0.0005
200000
LIMITATIONS OF MULTIPLIER
PRINCIPLE
• Resistance to Inflating Sanctions
– Punishment should fit the crime
• Difficulty in estimating accurately
the probability of punishment
• Individuals are not risk neutral
• Does not say which policy is
efficient
BECKER’S FUNDAMENTAL
RESULT
Fines are costless transfers
Resources devoted to punishment are
socially costly
High Fine – Low Probability
Fine= Entire Wealth
Probability -> Zero
BASIC PROPERTIES OF LAW
ENFORCEMENT
• Punishment should be based on harm to
the victim and not on the gain to the
criminal:
– Removal of illegal gains.
• Acts that have a benefit higher than the
external cost they cause SHOULD NOT
be deterred and SHOULD be punished.
• Acts that have a benefit lower than the
external cost they cause SHOULD be
deterred.
OPTIMAL LAW ENFORCEMENT
• Choose probability and sanction to maximize social
welfare -> Public Law Enforcement.
• Social welfare: Utilitarian Approach
Criminals: Illegal Gains – Expected Punishment
Victims: - Social Harm
Government/Taxpayers:
Expected Punishment – Enforcement Costs
Total: IG – H – Enforcement Costs
• Fine equals entire wealth (Becker)
• Probability equals
Harm/Fine – Marginal Cost of Enforcement
• Expected Fine is less than Harm
• Some under-deterrence is efficient (Polinsky and
Shavell)
• Complete deterrence is not efficient (PS)
QUICK OVERVIEW OF RISK
AVERSION
• Risk averse individuals are not
indifferent between any probability
and fine equal to social harm;
• Risk premium is strictly increasing
in the fine, but not in the
probability;
• Efficient fine is usually less than
the entire wealth: disutility of risk
premium is a social cost!
DETERRENCE WITH NONMONETARY
SANCTIONS
• Nonmonetary sanctions are different
because:
– They are socially costly to impose (NOT
costless)
– They create disutility (NOT transfer)
• Social welfare:
Criminals: Illegal Gains – Expected Punishment
Victims: - Social Harm
Government/Taxpayers: – Enforcement Costs
Total: IG – EP - H – Enforcement Costs
DETERRENCE WITH NONMONETARY
SANCTIONS
• Optimal Nonmonetary sanctions (PS):
• Should not be maximal…
• Should be used infrequently…
• Should be implemented once fines are exhausted…
» Less wealthy people
• Should only be applied for more harmful acts…
• Why not?
• Wealth is private information: imprisonment as a
device for information revelation (Levitt)
• Disutility of imprisonment (PS)
• Corruption or other means of punishment avoidance
(Garoupa and Klerman)
• [Death Penalty: Efficiency vs. Efficacy]
THE ECONOMIC THEORY OF
DETERRENCE
Building on the Maximal Fine Result and Implications for Public Policy:
• Marginal Deterrence (Stigler)
– Attempts
– Repeated Offenses
• Different Levels of Wealth (PS)
• Different Levels of Probability for same Resources (Bebchuk and Kaplow)
– Monitoring vs. Investigation (PS)
• Asymmetric Information (Bebchuk and Kaplow)
•
•
•
•
•
– Incentives to Acquire Information (Kaplow)
– Dissemination of Information by Government (Garoupa)
Self-Reporting (Kaplow and Shavell) and Plea-Bargaining
Criminal Avoidance Activities (Malik, Gravelle and Garoupa)
Errors (Png)
Corruption (Becker and Stigler, Bowles and Garoupa, PS)
Organize Crime (Garoupa) and Other Contexts with Extralegal Sanctions
(Cooter and Porat)
• Private Precaution by Victims: Moral Hazard (Hylton, Ben-Shahar and Harel)
• Judicial behavior, prosecution and juries
THE ECONOMIC EVIDENCE OF
DETERRENCE
• Criminology says no…
• Economics says yes… but…
– Probability is more effective than severity
of punishment;
– Debate over death penalty…
– Criminal justice is extremely costly…
– Difficulty in separating deterrence and
incapacitation…
RECENT DEVELOPMENTS
• Behavioral Law and Economics
– Criminals are bounded rational
– Policy implications are still weak…
• Law Enforcement is explained by Rent-Seeking (Garoupa and
Klerman)
– Enforcement generates rents (GK),
– Enforcement rules protect certain groups (Hylton and Khanna)
• Role of Enforcers
– Incentives (Becker and Stigler, GK)
– Law is Incomplete (Pistor and Xu)
• Content and Evolution of the Law:
– Conflict, Radical and Marxist Criminology
– Rent-Seeking
• Hate Crimes (Posner vs. Dharmapala and Garoupa)
• Domestic Violence
• Adultery (Rasmusen)
• Organized and Corporate Crime
OTHER GOALS OF ENFORCEMENT
• Incapacitation
– Benefit of incapacitation is the harm s/he would
commit otherwise;
– Imprisonment is more effective than fines;
– Probability of detection and punishment is
irrelevant.
• Rehabilitation
• Retribution
• Preference Shaping
– Stigma
THE GENERAL STRUCTURE OF LAW
ENFORCEMENT
Private versus Public Enforcement of the Law
• Theory
– Private is more Efficient (Friedman)
– Public is more Efficient (Landes and Posner)
– What is Private and what is Public here?
• Experiences:
–
–
–
–
Roman Law
Iceland
UK
Continental Europe
CRIMINAL VS. TORT
• Economic Explanations for Crime or Tort:
– Harm caused by crimes is different from that of torts because…
»
»
»
»
…
…
…
…
victimless crimes;
too many victims (collective action problem);
victims do not care about deterrence but compensation;
other external aspects of enforcement (shaping preferences);
– Political economy or rent-seeking theories:
• Groups shift the cost of deterring and punishing a certain act from private
(tort) to public (crime).
– Criminals should be stigmatized, but not tortfeasors.
– Criminals are uninsured, thus public intervention to guarantee
compensation.
• Economic Explanations for Crime, Tort and Regulatory Violation:
– Regulatory Enforcement is cheaper but less effective;
– Forces production of information by victims and enforcers;
– Generates “competitive enforcement”
» Duplication of Costs
» Deters Corruption
» Avoids Error
GENERAL STRUCTURE OF LAW
ENFORCEMENT
(from Shavell, 2003)
METHOD
CRIMINAL LAW
TORT LAW
CONTRACT LAW
SAFETY
REGULATION
INJUNCTION
CORRECTIVE
TAXATION
STAGE OF
INTERVENTION
PREVENTION,
ACT-BASED,
HARM-BASED
HARM-BASED
HARM-BASED
FORM OF
SANCTION
MONETARY,
NONMONETARY,
OTHER
MONETARY
MONETARY,
OTHER
PREVENTION
MONETARY,
AND ACT-BASED OTHER
PREVENTION
OTHER
ACT-BASED
MONETARY
PRIVATE
VERSUS PUBLIC
PUBLIC
PRIVATE
PRIVATE
PUBLIC
PRIVATE
PUBLIC
DETERMINANTS OF STRUCTURE OF
THE LAW
(from Shavell, 2003)
•
Determinants of Optimal Stage of Intervention
– Magnitude of Possible Sanctions for Deterrence
– Prevention
– Information about Acts:
»
»
•
•
When
Who … State… Parties
– Enforcement Costs
Determinants of Optimal Form of Sanctions
–
–
–
–
Level of Wealth
Illegal Gain
Harm
Resources Devoted to Detection and Punishment
»
»
Enforcement Costs
Distribution of Costs
Determinants of Public vs. Private Enforcement
– Information is primarily private
»
»
Reporting
Compensation, Retribution
»
Information systems may constitute natural monopolies
– Effort must be Expended to Identify Injurers
THE CASE OF CORPORATIONS
• Firms and Contracts as Nexus of
Contracts:
– “Cooperative Crime”
– Allocation of Liability b/w Employee and
Employer:
» Irrelevant [Coase Theorem]
» Relevant due to Transaction Costs [Agency Costs]
• Corporate Liability: Civil vs. Criminal
• Social harm of Corporate Crime
• Political Economy of Business Crime
COMPARATIVE LAW ENFORCEMENT
EUROPE vs. US
(Source: Francis Pakes, Comparative Criminal Justice, 2004)
US
LEGAL ORIGIN
ROLE OF JUDGES
COMMON LAW
(STATUTES)
JUDGE MADE
LAW
(SENTENCING
GUIDLINES)
SYSTEM OF
TRIALS
PLEABARGAINING
ADVERSARIAL
SANCTIONS
MORE NONMONETARY
YES
ADMINISTRATIVE
ENFORCEMENT
CRIMINAL
JUSTICE SYSTEM
JURY SYSTEM
CORPORATE
CRIMINAL
LIABILITY
UNIFICATION OF
LAW
ENFORCEMENT
YES
DECENTRALIZED
ENGLAND &
WALES
COMMON LAW
(EU LAW)
JUDGE MADE
LAW
(SEVERAL
CRIMINAL
JUSTICE ACTS; EU
LAW)
ADVERSARIAL
NO
(CROWN
PROSECUTION
SERVICES?)
MORE MONETARY
LIMITED
EUROPE
CIVIL LAW
PENAL CODE;
CIVIL CODE
INQUISITORIAL
YES/NO
(NEW SYSTEM IN
ITALY, FRANCE,
PORTUGAL)
MORE
MONETARY
YES
YES
MORE
CENTRALIZED
YES BUT WEAKER
CENTRALIZED
STRONG
WEAK
YES BUT VERY
WEAK/NO
WEAK
WEAK; FEDERAL
LAW
STRONGER;
PARLIAMENTARY
ACTS
EVEN STRONGER;
SCHENGEN
AGREEMENTS
COMPARATIVE LAW
ENFORCEMENT
NUMBER OF POLICES PER 100,000 POPULATION (2000)
Source: Francis Pakes, 2004
COUNTRY
US
300
England and Wales 347
France
349
Germany
311
Italy
477
Spain
488
Netherlands
254
Sweden
309
Japan
207
COMPARATIVE LAW
ENFORCEMENT
NUMBER OF JUDGES PER 100,000 POPULATION (2000)
COUNTRY
US
12
England and Wales 5
France
11
Germany
29
Italy
13
Spain
10
Portugal
13
Netherlands
12
Japan
4
COMPARATIVE LAW
ENFORCEMENT
NUMBER OF LAWYERS PER 100,000 POPULATION (2000)
Source: Council of the Bars and Law Societies of EU
COUNTRY 1990 2000
US
261 338
UK
150 283
France
43 68
Germany 83 142
Italy
105 160
Spain
140 241
Portugal 123 188
Netherlands 43 77
Belgium 137 155
COMPARATIVE LAW
ENFORCEMENT
NUMBER OF PRE-TRIAL CUSTODIES PER 100,000 POPULATION (1998)
Source: Francis Pakes, 2004
COUNTRY
Austria
26.2
England and Wales 24.3
Scotland
19.8
Northern Ireland 26.9
Italy
42.5
Denmark
15.5
Netherlands
19.9
Sweden
11.7
Portugal
37.0
COMPARATIVE LAW
ENFORCEMENT
PRISON RATES (2000)
Source: Francis Pakes, 2004
COUNTRY
Portugal 130
UK
125
Spain
115
Germany 95
Austria
85
France
80
Ireland
80
Denmark 60
Finland
55
COMPARATIVE LAW
ENFORCEMENT
DEATH PENALTY IN THE US 1977-1999
Source: Francis Pakes, 2004
STATE
Executions Death Row
at 1/1/2000
TOTAL
598
3,652
Texas
199
462
Virginia
73
31
Florida
44
389
Missouri
41
83
S&N Carolina
39
291
Louisiana
25
87
Georgia
22
134
California
7
561
Pennsylvania
3
232
FINAL REMARKS
NEW RESEARCH + MORE RESEARCH
• Theory
– Criminal Behavior  Psychology, Criminology, Sociology
» Shaping of Criminal Preferences
– Open the Black Box
»
»
»
»
Criminal Justice System
Judges and Law Enforcement
Enforcers and Law Enforcement
Victims and Law Enforcement
– Political Economy of Crime and Public Choice of Law
• Empirical Work
• Institutional Analysis and Comparative Law and
Economics
– Far behind other Social Sciences