Otto von Guericke - University Magdeburg
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1 Otto von Guericke - University Magdeburg Faculty of Economics and Management Seminar: PD Dr. Roland Kirstein Winter Term 2006/2007 Topic: Can punishment ever be efficient? Name: Anne Kartes Matriculation Number: Field of study: Management and Economics Semester: 5 anne_k1@hotmail.com - 8 th of January 2007-
2 Outline... I Abstract...II Key Words...II 1) Introduction...1 2) Economic Efficiency Applied to Punishments ) How an Efficient System Would Look Like ) Why Such a System Cannot be Used in Modern Criminal Law...3 3) Incentives...4 4) Examples of Punishment Systems ) The 18 th Century England ) Local Norms - Shasta County, California, Icelandic Sagas ) Concluding Comments on Examples...7 5) The Efficiency of Different Kinds of Punishment ) The Efficiency of Fines ) The Efficiency of Imprisonment ) Conclusion...11 Bibliography...13 Outline I
3 Abstract This paper s aim is to analyze whether punishment can ever be efficient or not. On the basis of a description of a fictional efficient model the paper examines why it is impracticable to employ an efficient system. Making use of different examples taken from history as well as today s society the paper concludes that legal rules have to be utilized to keep the system of punishment inefficient. Key Words Efficiency Punishments Rent-seeking II
4 1) Introduction Societies have always been confronted with criminal actions of individuals driven by incentives to make them better off. Punishments like fines, imprisonment or even executions, intend to lower the crime rate by deterring potential criminals to commit certain crimes. Punishments involve not only costs but also benefits for both, the offender and the victim. Efficiency is achieved if a situation cannot be improved -- if there is no possible situation that is superior to it 1. An efficient system of punishment penalizes the offender in the most cost-effective way, while remaining the appropriate level of deterrence for other criminal actions. However, the question arises if punishment can ever be efficient. What is the maximum level of fines, the optimal length of a prison term, or should society really do hang them all 2? The topic of efficient punishment is analyzed by taking historical societies as well as the modern legal system into account. In the following paper criminals are treated as rational and self-interested actors 3 trying to maximize their own benefits. The assumption is that crimes would not be undertaken if the expected cost of punishment exceeds the benefits conducting a criminal action. By treating criminals as rational actors it is possible to apply the model of economic efficiency to the subject of law. The universally accepted view is that the purpose of the criminal law is to protect legal interests and to influence the willingness of people to behave in certain ways. It is limited to protecting the basic values of the social order. An act can only be punished if provision was made for its punishment by statute before the act was committed. 4 This quote describes the universal Rule of Law appropriate to any modern legal system. The criminal law intends to influence the willingness of people to behave a certain way using punishments and the resulting deterrence. Crimes are still committed which shows that there also exists a willingness to pay for the damage imposed on others. 1 Friedman (2000), p See Friedman (1999). 3 See loc.cit., p Robbers (2003), p
5 2) Economic Efficiency Applied to Punishments The economic approach to the field of law dates back to the 18 th century to the Italian nobleman Cesare Beccaria. With his paper Crimes and Punishments (1764) he was the first one to consider crimes and their appropriate punishments with the aim of creating a better society and not taking revenge. According to Beccaria, the ideal punishment has only to exceed the advantage derivable from the crime; in this excess of evil one should include the certainty of punishment and the loss of the good which the crime might have produced. All beyond this is superfluous and for that reason tyrannical. 5 The reason we do not catch all murderers or criminals in general is that doing so would cost more than it is worth. A standard of proof that is low enough will also convict innocents 6. Furthermore, it would be inefficient to invest too many resources in the detection of criminals in order to decrease the crime rate down to zero. Societies tolerate a positive crime rate. 7 Efficiency is reached once the most cost-effective punishment is employed - offering maximal deterrence at lowest possible costs. Deterrence depends on the expected fine, prison term, or alike, therefore, an expected punishment with lowest possible costs for the economy should be employed. 8 Criminals are rational actors only committing crimes if the potential benefits exceed the expected costs of punishment. 2.1) How an Efficient System Would Look Like In his paper: Why Not Hang Them All: The Virtues of Inefficient Punishment., David Friedman points out the aspects, which make punishment efficient and why the modern legal system has failed using efficient punishments. Based on Friedman, fines seen as a sort of revenue for the state dominate imprisonment as well as execution. 5 Beccaria (1764), p Friedman (1986), p See Kirstein/Schmidtchen (2003), p See loc.cit., p
6 With the description of a fictional world with low punishment costs but harsh punishments for the criminal, Friedman evaluates how a world of efficient punishments would look like. Based on the efficiency principal the lower the cost for the state and the higher deterrence the more efficient a punishment is. Punishment costs can be cut down to a very low level, if no prisons were to exist. The largest possible amount of fines are to be collected, in case an offender cannot pay fines should be made collectible by the threat of an even worse punishment. Furthermore, temporary slave labor should assure that offenders produce more than it costs to feed and guard them. If that does not hold anymore, execution would be appropriate and offender s organs could be used for transplants. 9 As this example shows, the cost to the offender if convicted would be very high and due to the harsh punishment deterrence would be high whereas the legal system would save money and even gain by convicting criminals. Punishment could not be more efficient. 2.2) Why Such a System Cannot be Used in Modern Criminal Law There are several costs occurring when using such a system of punishment other than monetary costs which are less measurable. Fist of all, because our populations are squeamish 10 the loss in utility from knowing that convicted criminals would be mistreated would offset the direct gains. Restricting the legal system to less severe punishments, which would be inefficient, might therefore actually prove to be efficient. 11 Society would not suffer any loss in utility and a shift to less cruel punishments can be just as efficient. Secondly, based on Friedman, the most striking argument against employing such a system is that somebody gains what a convicted defendant loses. The world of efficient punishments would therefore be subject to manipulation. 9 See Friedman (1999), p See loc. cit. 11 See loc. cit., p
7 It would be in the interest of that person who benefits most from a convicted criminal to really do convict the criminal no matter if guilty or not. This imposes the risk on society to also execute punishments on innocents. Although, the system of efficient punishments seems to be plausible at first glance, it offers no assurance of protecting innocents; it can easily be manipulated by influential people and upsets society as a whole by not functioning according to ethical and moral standards. 3) Incentives In the theory of optimal punishment the state is often considered as a philosopher-king, a wise, benevolent, wholly altruistic organization with imperfect knowledge 12. In contrary to the tort law, that is enforced by private and self-interested parties. In tort law victims and their attorneys are able to take legal actions with the incentive of maximizing their own wealth. 13 As happened in the generally known McDonald s hot coffee Case in the U.S in the beginning of the 1990 s. Friedman makes use of this excursion to tort law in order to point out that there should be no difference made between the incentives of all actors involved. Treating all actors, including the state, the same will lead to the additional cost of rent seeking in the criminal law. The legal system becomes a mechanism to be used by some people to expropriate other people who respond by taking expensive precautions to avoid being expropriated. 14 This would lead to inefficiencies not only because some people try and manipulate the system to benefit and others spend useful resources in preventing to be a victim of manipulations but also the punishment system itself would have to be kept inefficient in order to prevent such incidents. As in economics as well incentives play an important role when evaluating people s behavior and should not be left aside when considering the efficiency of punishments. 12 Friedman (1999), p See loc. cit., p See loc. cit., p
8 Rent-seeking seems to be the major problem when taking incentives to enforcers into account. Due to out-of-court settlements, referred to in criminal law as bribery, it is hard to keep the enforcement system inefficient. 15 The Ruby Ridge Killings prove evidence of how incentives of all actors matter even in today s society. Randy Weaver who attended meetings of a white supremacist group was a victim of the Bureau of Alcohol, Tobacco, and Firearms (BATF) intending to extort Weaver in order to gain valuable information on other people who shared his political view. The benefit to the enforcers was service in taking actions against potential criminals. The Ruby Ridge Killings show how even in modern legal systems the incentives of enforcers matter and that the threat of punishment is used to benefit from out of court settlements in money, information, testimony, or other services. 16 The problem behind the Randy Weaver case shows that law enforcers do not always focus on preventing crime but on gaining valuable information for future actions. 4) Examples of Punishment Systems To evaluate whether punishment can ever be efficient or not it is useful to examine the history of different systems of punishment and prosecution as well as a system of punishment based on local norms. Substantial differences can be found but also reasons against employing such forms of penalty in today s society or in the future. Moreover, the distinction between privately and public enforced punishment systems gives further evidence of the efficiency or inefficiency of punishments. 4.1) The 18 th Century England Analyzing enforcement in the 18 th inefficiency of a partially private enforcement of law. century England Friedman demonstrates the 15 Friedman (1999), p See loc. cit., p
9 In the 18 th century, England applied a system of private enforcement without governmental prosecutors. Anyone who suffered harm could prosecute. What was the motivation behind such a prosecution, which rose additional cost for the victim? Clearly, incentives to prosecute were missing. The victim had to bear the additional cost of punishing the offender which led to reduced prosecutions and was inefficient. The British Crown tried to motivate prosecution with the introduction of rewards, as also known from the reward system of the 19 th century U.S. Wanted Dead or Alive: $150 Reward. The incentives to prosecute have been increased which led to a new problem. The over enforcement of prosecutions occurred. People became interested in benefiting from the prosecution by receiving the high reward. As Friedman found out the reward could amount to 100 or even more. 17 Compared to approximately 18 pence a day being the common price of labor in London 18 to that time the reward system offered considerably high incentives to prosecute. People engaged in supporting each other as eyewitnesses in front of the jury to split the resulting reward which resulted in a skeptical jury that made it hard to convict even guilty defendants. As a result, the system of rewards was mostly abandoned by the middle of the century. 4.2) Local Norms - Shasta County, California, Icelandic Sagas A privately enforced punishment system can be found in Shasta County, California. 19 By law of California a livestock owner typically is not legally liable for damages stemming from the accidental trespass of cattle upon unfenced land. 20 This system s functioning is based on the norms of neighborly behavior. Friedman gives an example, according to Ellickson, of how this system works. A neighbor s cattle get lost into the victims field and damage the crops. According to the local norms, the neighbor should apologize and offer help in repairing the damage done as well as making sure that such incident will not happen again. 17 See Friedman (1999), p Adam Smith, as cited in Friedman (1999,) p Initially described by Robert Ellickson in Order without Law (1991). 20 Libecap (1993), p
10 In case the neighbor fails to behave appropriately, the victim may respond in different ways. First of all, negative gossip could be employed. If that shows no effect, further actions might be initiated. Costs could be imposed by driving the cattle off to another place, which does not only impose costs on the offending neighbor but also additional costs on the victim. A more efficient punishment would be to slaughter or sell an animal but this behavior is not permitted by the private norms and therefore, most likely not employed by the victim. Friedman argues the system of private norms is not efficient because it prohibits the use of the most efficient punishment. Seen from a social perspective this model, indeed, might be an efficient one since it maximizes the objective welfare of group members and encourages low-cost cooperative behavior. 21 A similar example, also stated by Friedman, appears in the Icelandic sagas. When a family member was injured by somebody from another family, local norms required that the conflict is to be settled peacefully. In case a peaceful settlement of the conflict was not possible the victim s family was required to take revenge by eventually killing the offender or someone out of the opposing family. As in the case of Shasta County, punishment was costly to the victim or in general to the person responsible for the punishment. The executor of the punishment could get injured or killed as well which contains a substantial cost. Consequently, only punishments were enforced that were driven by strong reasons to do so. 4.3) Concluding Comments on Examples These examples show how over enforcement was avoided in prior history by an increased cost of punishment and are also evidence of why lowering the costs of enforcement might lead to costly rent-seeking as happened to an extreme in the 18 th century England. 21 Libecap (1993), p
11 As a result, punishments should also be costly to taxpayers, victims as well as nonvictims and not only to the offender. Apparently, punishment has to be restricted by rules which make it less efficient but also more secure against potential benefits of the prosecutors. These examples also show, referring to Shasta County, CA, that punishments can be economically inefficient and still prove to be efficient for local neighbourly behaviour. An interesting point made by Friedman s paper is that one can avoid rent seeking by using death penalty only, without using organs for transplants. No one would benefit from the execution and costs would only be imposed on the offender. Nonetheless, it is most likely that people who are political not influential would suffer over enforcement and a rent-seeking struggle would take on the form of bribery. 5) The Efficiency of Different Kinds of Punishment 5.1) The Efficiency of Fines Friedman regards fines as being the most efficient form of punishment since they can be seen as a sort of revenue for the state. Gary S. Becker argues that fines are simply social transfer payments since they do not use resources of the state. 22 According to Friedman, the largest possible amount should be collected before other sorts of punishments are to be employed. Economic efficiency ignores the fact that a dollar is worth more to some people than to others 23. Since we are considering the costs and benefits to large and heterogeneous groups of people these differences are likely to average out. 24 Therefore, no distinction between different levels of wealth will be considered. 22 See Becker (1968), p Friedman (2000), p See loc. cit. 8
12 Polinsky analyzes the efficiency of employing fines only. An example of the optimal amount of fines which reduce enforcement costs to the state but keep the expected fine to the risk-neutral offender equal to the harm done is given by Polinsky. 25 In this example, the expected fine must equal the harm done. Again, only when the benefit to the offender exceeds these expected costs the crime will be committed. Consequently all others will be deterred. Regarding to Polinsky, the highest possible fine that can be imposed on an offender is equal to the offender s wealth. In the following example the offender s wealth amounts to If the harm done to the victim was 15 the expected fine must total 15 as well. Table 1 provides the corresponding values to the example. The expected fine (4) for a risk neutral person is calculated by multiplying the probability of detection (2) times the actual fine (3). All enforcement expenditures are efficient as long as the expected fines are equal to each other given each level of detection probability. Obviously, the cost per offense increases with probability of detection. A high probability of detection leads to high enforcement costs due to the employment of more police making sure that 100% of the offenders are actually being fined. The question is to be asked, if it is really worth to society to deter all criminal actions by eventually turning 50% of the people into police officers? Table 1 represents an adapted example based on Polinsky s double-park example. Table 1 Enforcement Costs (1) Probability of detection (2) Actual Fine (3) Expected Fine (4) , , The most efficient fine would be with a probability of detection equal to 0,001 and minimized enforcement costs of See Polinsky (2003), p
13 Summing up, the optimal deterrence of disobedience can be achieved with each level of expenditure on enforcement provided that the fine is set appropriately. 26 The efficient system of law enforcement requires fines that are as large as possible equal to the wealth of the individuals whose behaviour is being controlled 27. Additionally to Friedman, Polinsky also considers the optimal fines for risk-averse offenders which differ by taking the risk premium into account. This paper will not examine the risk-averse case further since the result is similar. A criticism of the efficient amount of optimal fines might be that they do not proof to be as efficient because people tend to ignore very small probabilities of detection. Furthermore, if mistakes in the law enforcement procedure are likely, the risk-bearing costs would be larger and the optimal system of law enforcement would involve a higher probability of detection and a lower fine in order to reduce these costs ) The Efficiency of Imprisonment Friedman regards imprisonment to be dominated by fines. 29 Seen from a social perspective more serious crimes should be punished using harsher punishments such as imprisonments which cost taxpayers more money than other forms of punishment. Using imprisonment as a sole form of punishment might lead to under deterrence or over deterrence 30. Similar to the use of fines, the use of relatively high imprisonment sentences requires a lower probability of detection to achieve the wanted level of deterrence. 31 However, according to Polinsky, it has to be distinguished between different levels of disutility emerging due to different lengths of the imprisonment sentence depending on the individual who can either be risk-neutral, risk-averse or even risk-seeking See Polinsky (2003),p See loc.cit. 28 See loc.cit., p Friedman (1999), p Polinsky/Shavell (1983), p See Polinsky (2003), p See loc. cit. 10
14 Due to the higher costs for society linked to imprisonment maximal fines should be used with imprisonment. 33 As a result, imprisonment cannot be as efficient as fines. It might provide a higher level of deterrence to some people but it might also provide a lower level of deterrence to others that cannot pay fines. Imprisonment sanctions are used in today s society which is subject to other reasons. It might prove to be capable of deterring criminals from engaging in illegal actions even more efficiently by simply not enabling them due to a preventive detention. 6) Conclusion The question whether punishment can ever be efficient is very profound to answer because the economic analysis should give equal weight to the costs and benefits of murderer (or in general offender) and victim 34 and also take the rational self-interested behavior of everyone involved into account. The most efficient legal system of punishment mentioned in part 2.1 of this paper and originally introduced by Friedman, indeed proves to be highly efficient considering the low costs for the government and high costs to the offender. Nevertheless, this example made also clear that substantial costs arise for society as a whole which cannot be left out when evaluating the efficiency of a system. Costs such as rent-seeking and the disutility of society that come into existence when knowing that convicted criminals are being mistreated cancel out the gains. As a conclusion the punishment system has to be inefficient but still manage to provide the appropriate level of deterrence. Inefficiencies are achieved by the use of local norms or legal rules. The modern legal system is a combination of both private and public enforcement of law. As the McDonald s hot coffee case shows, private enforcement of law leads to rent-seeking. The victims as well as their attorneys try to achieve the maximum compensation for the harm suffered. Therefore, out-of-court settlements are wanted and improve the efficiency. 33 Polinsky (2003), p Friedman (1986), p
15 The criminal law is also affected by bribery in order to gain valuable information, money or other benefits; this was shown by the Randy Weaver Case. Fines dominate imprisonment because they can be seen as a sort of revenue for the state and deter people engaging in criminal actions. 12
16 Bibliography Beccaria, C. (1764), On Crimes and Punishment, translated by Paolucci (1963), Bobbs- Merrill, Indianapolis. Becker, G.S. (1968), Crime and Punishment: An Economic Approach, in: The Journal of Political Economy, Vol. 76, No.2, pp Ellickson, R. (1991), Order without Law: How Neighbors Settle Disputes, Harvard University Press, Cambridge, Mass. Friedman, D. (1986), Price Theory: An Intermediate Text, South-Western Publishing Co., y_chap_15.html, Friedman, D. (1995), Rational Criminals and Profit-Maximizing Police: Gary Becker's Contribution to the Economic Analysis of Law and Law Enforcement, in: The New Economics of Human Behavior, Mariano Tommasi and Kathryn Ierulli, editors, Cambridge University Press, pp Friedman, D. (1996), Hidden Order: The Economics of Everyday Life, Harper-Business, New York. Friedman, D. (1999), Why Not Hang Them All: The Virtues of Inefficient Punishment, in: The Journal of Political Economy, Vol.107, No. 6, Part 2: Symposium on the Economic Analysis of Social Behavior in Honor of Gary S. Becker, pp
17 Friedman, D. (2000), Law's Order: An Economic Account, Princeton University Press, Princeton, New Jersey. Kirstein, R /Schmidtchen, D.(2003), Ökonomische Analyse des Rechts, Center for the Study of -Discussion Paper, Libecap, G.D. (1993), Review on: Order without Law: How Neighbors Settle Disputes, in: Journal of Economic Literature, Vol. 31, No.1, pp Polinsky, A. M. (2003), An Introduction to, 3rd Edition, Aspen Publishers, New York. Polinsky, A.M./Shavell, S. (1983), The Optimal Use of Fines and Imprisonment, in: The Journal of Public Economics 24, pp Robbers, G. (2003), An Introduction to German Law, 3 rd Edition, NOMOS Verlagsgesellschaft. David Friedman s Homepage: Crime Library, ml,
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