Does Crime Pay? An Economic Analysis of Criminal Behavior

This Thesis examines issues of crime and law enforcement from an economic standpoint, focusing on the incentives for criminal behavior and the efficiency of various law enforcement policies. The economic approach to criminal behavior supposes that at least some portion of criminal behavior is rational and responds to certain incentives in a predictable way, which would have several important implications for law enforcement and other aspects of public policy. This analysis has both microeconomic and macroeconomic components. The microeconomic analysis examines the decision to engage in criminal activity at the individual level. Each individual must choose how to allocate his time between working in legitimate market jobs, taking time off for leisure, and engaging in criminal activity. For some individuals, participating in crime will be a rational decision, in that even after accounting for the possibility of being caught and punished, the payoffs to criminal activity may exceed the wages he receives from legitimate work and the psychic value he places on additional leisure time. This model of the individual's crime decision makes three important predictions. First, as an individual's legitimate work opportunities increase, his incentives for engaging in criminal activities will decrease; this means that increases in an individual's education, work experience, or health and vigor should reduce his participation in crime. Second, the incentives to engage in crime will be higher when the returns to crime are higher, so holding all else equal, we should find more crime in rich communities, where there is more wealth to steal, and more crime being committed by the poor, as they have less to lose from jail time and greater need for each additional dollar. Third, and most important, individuals should commit less crime when the probability of being punished or the amount of punishment is increased. These considerations need not be exhaustive -- surely there are many other factors that also influence whether a given person engages in crime -- for them to exhibit a strong effect on many individuals' behavior. The macroeconomic analysis explores the interaction of crime and law enforcement at the aggregate level. While crime imposes tremendous costs upon society, the social costs of crime prevention measures (such as police and prisons) can also be very substantial. These two competing costs imply that there exists a socially optimal level of law enforcement, above which the costs of additional enforcement will exceed the gains. It will not be efficient to try to catch every single criminal, nor will it be efficient to use excessive or draconian punishment when the form of punishment (such as imprisonment) is costly to administer. Identifying the optimal probability and severity of punishment for a given crime poses a difficult challenge for policymakers. After constructing a formal model and deriving these predictions, the second half of this Thesis presents several empirical tests to examine the strength and accuracy of the model's predictions. The first empirical analysis combines data on crime, income distribution, unemployment, and government expenditures to perform a state-level macro analysis and finds consistent evidence of the deterrent effect of law enforcement across a wide variety of econometric specifications. The second analysis looks at comprehensive individual-level survey data collected by a federal government survey in the 1980s and finds very significant evidence that an increased police presence deters crime; that better labor market opportunities (as measured by an individual's age, education, health, and local unemployment levels) result in lower crime; and that greater returns to crime (measured by the local mean income) correspond to higher crime rates. The third analysis looks at an exogenous increase in the punishment for illegal use of the narcotic oxycodone but fails to find clear evidence that the increased punishment resulted in a decrease in the number of oxycodone crimes relative to other narcotics or to similarly punished non-narcotics. The Thesis is organized as follows. Chapter One provides an overview of the costs of crime in the United States and introduces the economic approach to law enforcement and criminal punishment. Chapter Two constructs a formal model of "rational crime" and derives several results that have broad significance for numerous areas of public policy. Chapter Three reviews the past empirical literature on crime and extends this work by presenting the results of three new empirical studies.