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 deale

rs still live with their moms?

   During gang war No gang war Revenues $44,500 $58,900Cost of drugs sold 11,300 12,800Gross profit 33,200 46,100        Operating expenses      Wages (officers) 2,300 3,800Wages (street pushers) 23,300 33,800Weapons 3,000 1,600Tribute to central gang 5,800 5,900Mercenary fighters 5,000 0Funeral expenses 2,300 800Miscellaneous expenses 3,000 3,400Total operating expenses 44,700 49,300        Other income      Dues* 10,000 10,000Extortion 0 8,000Total other income 10,000 18,000        Net profit (loss) ($1,500) $14,800

What crime pays A drug gang’s monthly income statement

*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

onapprehensi ofy probabilit)( xp

xCxp )(max

x = dollars of search activity

0)(,0)( xpxp

C = dollar benefit to society of an apprehension

1)( Cxp

A Marginal AnalysisOptimal level of search activity is where the marginal cost of search is equal to the marginal benefit of apprehension

With market segmentation of criminals

A dollar spent in each market segment should provide the same marginal benefit

1)()( CxpCxp BA

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 ExampleSeparate Communities Group A Group BTotal Population 100 100Estimated number of criminals 50 10Cost of a search $1 $1Expected cost of apprehension $2 $10

Combined CommunityTotal Population 200Estimated number of criminals 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