The Economics of Law The Economics of Law EnforcementEnforcement

Nuno GaroupaUniversidade Nova de Lisboa

CEPR, London

ESNIE 2004ESNIE 2004

OVERVIEW OF LECTURE

1. Introduction2. Public Nature of Law

Enforcement1. Basic Theory2. Recent Developments3. Other Goals of Law

Enforcement

3. General Structure of Law Enforcement

1. Private vs. Public2. Criminal vs. Tort3. Joint Methods of Legal

Intervention4. Special Case of

Corporations

4. Comparative Aspects of Law Enforcement

1. Administration of Law Enforcement

2. Institutional Analysis

5. 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

Law-Content

-Completeness-Institutions

-Tort vs. Crime-Administrative

Law-Content

-Completeness-Institutions

-Tort vs. Crime-Administrative

Law Enforcement

-Goals-Sanctions-Resources

-Organization of Justice System

Law Enforcement

-Goals-Sanctions-Resources

-Organization of Justice System

Individual Behavior

-Illegal gains-Costs of breaking

the law-Rational behavior

-“Born to be Bad”

Individual Behavior

-Illegal gains-Costs of breaking

the law-Rational behavior

-“Born to be Bad”

Social Behavior-Social Contract

-Political Economy

Social Behavior-Social Contract

-Political Economy

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=€100PROBABILITY SANCTION

1 1000.5 2000.1 10000.01 10000

0.001 1000000.0005 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 transfersResources devoted to punishment are

socially costly

High Fine – Low ProbabilityFine= Entire WealthProbability -> 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 HarmGovernment/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 HarmGovernment/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 STAGE OF INTERVENTION

FORM OF SANCTION

PRIVATE VERSUS PUBLIC

CRIMINAL LAW PREVENTION, ACT-BASED, HARM-BASED

MONETARY, NONMONETARY, OTHER

PUBLIC

TORT LAW HARM-BASED MONETARY PRIVATE CONTRACT LAW HARM-BASED MONETARY,

OTHER PRIVATE

SAFETY REGULATION

PREVENTION AND ACT-BASED

MONETARY, OTHER

PUBLIC

INJUNCTION PREVENTION OTHER PRIVATE CORRECTIVE TAXATION

ACT-BASED MONETARY 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

– Effort must be Expended to Identify Injurers» Information systems may constitute natural monopolies

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 ENFORCEMENTEUROPE vs. US

(Source: Francis Pakes, Comparative Criminal Justice, 2004)

US ENGLAND & WALES

EUROPE

LEGAL ORIGIN COMMON LAW (STATUTES)

COMMON LAW (EU LAW)

CIVIL LAW

ROLE OF JUDGES JUDGE MADE LAW

(SENTENCING GUIDLINES)

JUDGE MADE LAW

(SEVERAL CRIMINAL

JUSTICE ACTS; EU LAW)

PENAL CODE; CIVIL CODE

SYSTEM OF TRIALS

ADVERSARIAL ADVERSARIAL INQUISITORIAL

PLEA-BARGAINING

YES NO (CROWN

PROSECUTION SERVICES?)

YES/NO (NEW SYSTEM IN ITALY, FRANCE,

PORTUGAL) SANCTIONS MORE NON-

MONETARY MORE MONETARY MORE

MONETARY ADMINISTRATIVE ENFORCEMENT

YES LIMITED YES

CRIMINAL JUSTICE SYSTEM

DECENTRALIZED MORE CENTRALIZED

CENTRALIZED

JURY SYSTEM YES YES BUT WEAKER YES BUT VERY WEAK/NO

CORPORATE CRIMINAL LIABILITY

STRONG WEAK WEAK

UNIFICATION OF LAW

ENFORCEMENT

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