The Economics of Crime
Introduction What determines criminal behaviour? Traditional social scientific thinking would point to age, sex, education, as well as family, and social and cultural background. But evidence has emerged indicating that economic incentives and decisions play an equally large part in criminal activity. This suggests that the solution for problems of rising crime should derive as much from the economist as it does from the criminologist. In this feature, Ricardo Lagos, assistant professor at New York University, argues that it is time to rethink the traditional approach to tackling crime.
Crime is always a sensitive political issue, as politicians around the world have found, often to their cost. They get blamed for rising crime; they rarely get credit when the crime rate falls. In Britain, for example, the Blair government is struggling to get to grips with significant increases in the crime rate after several years of decline. The talk is of getting tough with criminals and making the police more effective. But is it time to re-think the traditional approach to dealing with crime? A growing body of research into the economics of crime suggests that it is.
Crime keeps getting worse
Over the years, social scientists have identified a wide range of factors which help determine criminal behaviour. These include age, sex and the level of education as well as family, social and cultural background. But since the first economic analysis of crime by Gary Becker in 1968, economists have become increasingly convinced that economic incentives may be a crucial determinant of criminal involvement, at least in property crime. The unifying principle of this approach is that underlying most crimes and criminal careers there is an individual evaluating costs and benefits. Identifying and understanding the mechanisms that shape people's criminal decisions is important because these mechanisms hold the solutions to the crime problem. Understanding how criminals respond to economic incentives could therefore provide new and useful policy tools for the fight against crime.
Leaving aside the potential reward from criminal activity, we would expect a negative correlation (or inverse relationship) between the factors listed above and the crime rate. If potential criminals do respond to the relative rate of return from crime as determined by those variables, then changes and trends in crime rates could in turn be associated with changes and trends in these variables. This would then provide policymakers with a much wider range of policy tools with which to try to combat crime. But how much evidence is there for the link suggested?
A convincing tale
Detailed analysis of their findings led the authors to conclude that the main factors responsible for the reduction in the aggregate property crime rate in the US between 1980 and 1990 were (ranked in descending order of importance): the increase in the likelihood of being caught resulting from the rise in spending on the police, the increase in the real wage and the change in the demographic structure.
Demographic factors are important because a large fraction of crime in the US is committed by youths aged 18 or below. The proportion of young people in the total population declined in the 1990s: 20.5 percent of the population was aged between 15 and 25 in 1980, but that had fallen to 15.1 percent by 1996. Since youths have a higher propensity to engage in crime, the reduction in the fraction of youths as a result of the demographic transition contributed to the decline in the crime rate.
The penalties matter
Steven Levitt has examined whether the different patterns of youth and adult crime could be seen as a rational response to changes in the likelihood and severity of punishment for these groups. According to approximate measures of the likelihood and severity of punishment, Levitt argues that the severity of punishment for youths was roughly the same as for adults in 1978 but only half as severe in 1993. His analysis suggests that 60 percent of the difference in the growth rate of crimes committed by adults and youths can be explained by the relative change in severity of punishment between both groups. This suggests that youths do take account of changes in the likelihood and severity of punishment when deciding whether to become involved in crime. And other evidence supports this analysis: there are sharp changes in criminal involvement with the transition from juvenile to adult court. Violent crimes committed by youths coming under the jurisidiction of adult courts fell by 4 percent in those states where juvenile courts are lenient relative to adult courts, but rose by 23 percent in those states where juvenile courts are severe vis-à-vis adult courts.
It's worth noting Grogger's conclusion that wage differences are partly responsible for the differential participation in crime between blacks and whites in the US. It is well known that blacks earn less than whites, even when both have the same observable characteristics (such as age, education, experience and type of work). In addition, police records seem to show that in the US, blacks have a higher propensity to participate in criminal activities. Grogger's analysis suggests that this is in part a labour-market phenomenon: the fact that blacks earn less than whites accounts for a third of the difference in criminal participation between both groups. Recent Centre for Economic Performance research has found strong evidence from UK data to support the idea of a negative relationship between wages (in particular wages at the lowest end of the wage distribution) and crime.The lessons for policymakers
There is a wealth of other evidence to support the idea that there is a clear relationship between incentives and crime. These "incentives" should be understood in the broadest sense, to include the likelihood of being caught and the severity of the punishment as well as those which explicitly determine the costs and benefits of criminal activity. The evidence for such relationships appears strong enough for at least some analysts to argue that anti-crime policies should take account of them. The positive correlation often found between measures of income inequality and the property crime rate, for instance, has led some economists to suggest redistributive taxation as an anti-crime policy. And recent work by this author and others suggests that under some conditions, more generous unemployment benefits can reduce the crime rate provided at the same time punishment is sufficiently likely and severe. (If the penal system is too lenient, increases in unemployment benefits may have perverse effects on crime.) Policymakers tend to address economic problems with the economist's toolkit and crime problems with the criminologist's toolkit. So concerns about the welfare of the unemployed are dealt with by proposals for more generous unemployment benefits, while rising crime leads to calls for more police. But the fact that we know how criminals and would-be criminals react to certain economic and other incentives opens up a whole new role for economic anti-crime policies. When the crime rate is too high, the policy menu consulted to remedy the situation should include economic as well as traditional anti-crime policies. And the optimal way to respond will almost surely include a mix of both.
This article is taken from CentrePiece magazine published by the Centre for Economic Performance at the LSE. Copyright The London School of Economics and Political Science.