Crime 1 LECTURE NOTES LAW AND ECONOMICS (41-240) M. Charette, Department of Economics University of Windsor DISCLAIMER: These lecture notes are being made available for the convenience of students enrolled in 41-240, Winter 2002. They represent a first go at this part of the course in Law and Economics. It is anticipated that these notes will undergo many subsequent revisions. In their current form they are essentially unedited. Any comments, criticisms or suggestions are welcomed. Return to the home page for information on contacting the author. These notes follow the general outline and, to a lesser extent, the content of Law and Economics 3rd ed., Cooter, Robert and Thomas Ulen, Addison Wesley, New York 1999. NOTE: In what follows, text depicted in small type represents a reminder to the author and should be ignored by the reader. THE FOLLOWING NOTES HAVE NOT BEEN PROOFED PART F-I The Economic Theory of Crime and Punishment There are two fundamental question which must be answered: 1. What acts should the state punish? 2. To what extent should a given act be punished? Why are theses issues not simply handled as part of tort law? Historically they largely were handled as part of the common law of crimes
Crime 2 I. The Traditional Theory of Criminal Law The common law of crime has been replaced by criminal statutes. It has been codified. This codified criminal law embodies the traditional theory of criminal law which includes the following: 1. Intended wrongs (crimes) versus accidental wrongs (torts - some not all) 2. Public nature of harm in addition to the private nature of a tort. 3. The plaintiff is the estate not a private individual 4. The standard of proof is higher in a criminal as opposed to civil action. 5. A guilty defendant is punished, as opposed to simply making restitution. Broadly, the traditional theory is based on the simple notion that if someone does something wrong and they are found guilty, they should be punished and they should be punished in proportion to the seriousness of their crime. The traditional theory focuses on the individual and the act. NOTE: Economic theory focuses on societal welfare (takes the perspective of society as a whole - utilitarian ). An act should be made a criminal act if doing so enhances social welfare. An act should be punished to the extent that it maximizes social welfare. A. Criminal Intent Accidental harm vs. intentional harm mens rea - a guilty mind see Figure 11.1 B. Public Harm and Public Prosecution
Crime 3 Property, contract and tort law generally (but not always) deal with private - harm imposed by one individual on another. In criminal law more of the harm is of a public nature. A murderer kills his/her victim but also cause a general increase in fear and loss of a sense of security for all members of society. 1. This public nature of criminal acts is why in criminal law the plaintiff is the the crown in Canada, as opposed to the specific person harmed in the criminal act (victim). In civil law the victim is always the plaintiff. 2. The notion that criminal acts harm the general public allows for the possibility of victimless crimes (drugs, gambling, prostitution). Even though the parties to these transaction enjoy mutual gains (and economic theory would as a result find no basis for them being classified as crimes). The traditional theory argues that there are victims - society as a whole - whose peace and security is threatened. 3. What if someone attempts to harm another but fails. There are no loses, no actual injury, no basis for a tort. But traditional theory argues that the attempt to harm causes a fear and loss of security so that the attempt should be punished, even if it failed. C. Standard of Proof Standards of proof Civil case - preponderance of the evidence (plaintiff is more convincing than the defendant - just tip the scales of justice) - 51% Criminal case - beyond a reasonable doubt (clear and convincing evidence) - 90%/95%/99%? Why? (from traditional theory) 1. convicting an innocent person seems worse than letting a guilty person go free (Type II and Type I error). 2. The prosecution in a criminal matter can bring the full force of the state (prosecutor/police/etc.) and all its resources down on the defendant. The heavier burden of proof helps to offset this advantage.
Crime 4 D. Punishment Punishment: 1. Incarceration (jail) 2. Restriction of movements (bail terms, house arrest, etc.) 3. Fines 4. Corporal punishment - beatings, mutilation, death Recall compensation in civil law aims to restore the victim to his/her previous level of wellbeing. Punishment in criminal law is intended to harm the injurer but without making the victim better off. (There is some very slow movement in this area.) Punishment and compensation might be substitutes or both be imposed. Perfect compensation: a sum of money that makes the injured indifferent to having suffered the injury or not having suffered the injury. Perfect disgorgement: a sum of money that makes the injurer indifferent to having caused the injury or not having caused the injury. In criminal law, monetary punishment (fines) are intended to be a sum of money that makes the potential injurer prefer not causing an injury- intended to remove whatever incentive the potential injurer has to commit the crime. II. An Economic Theory of Crime and Punishment Problems with the traditional theory
Crime 5 - does not provided a model of predictive behaviour. - does not provided a clear objective for criminal law (stop people from doing bad things??) In what follows: - distinguish between civil vs. criminal prosecutions - predictive model of criminal behaviour - propose a clear objective for criminal law (Surprise Surprise - minimize the social costs of crime). A. Inadequacy of Tort Law and the Necessity of Criminal Law If civil suits could cause the potential injurers to internalize the total social cost of their actions, then criminal law would be unnecessary. Why cannot civil suits do this? 1. inherent limitations of compensation - losing a leg, being killed, being abused? We can make civil awards that provide potential injurers with the incentives not to take unreasonable but we cannot really define a sum of money that provides perfect compensation. Criminal punishment is intended to deter intentional harms not compensate for them. How much would you pay to lose an eye or a child? This makes no sense. The victim cannot really considered these questions in terms of indifference. Even if the victim could conceive of a level of perfect compensation, we could never really know what that compensation was. There are no markets for legs, eyes, children, emotional stability, etc. The problem of preference revelation. A thief steals your perfectly efficient artificial leg/ an assaulter causes you to loses your real leg. What s the difference with respect to compensation. 2. What about the wide range of crimes for which perfect compensation is possible, can we dispense with criminal law? NO. Rights versus interests
Crime 6 Law of trespass protects interest in property but does not grant an absolute right to property. A person can trespass in an emergency but must pay compensation. At times we will want to protect rights not interests 3. Perfect compensation might not be able to deter so that punishment becomes necessary. Thief steals a $30,000 car gets caught five minutes later and must return the car and pay $100 for the victim s time and out-of-pocket expenses - perfect compensation Not good enough, the victim is returned to her former level of well-being but the thief is not deterred from committing further thefts. Why not? What if there was a 20% chance that the thief would have escaped? Expected value to the thief of stealing the car: 0.2($30,000) + 0.8($0 - $100) = $6,000 - $80 = $5,920 Internalization for torts versus deterrence for crimes If - perfect compensation not possible (in principle or practice) - desire to protect rights not interests - enforcement errors will occur then punishment is necessary. Psychological commitment and punishment: deterrence. The stronger the psychological commitment to the act the greater the required deliberate act versus accident deliberate act versus spontaneous act (pre-meditation) repeated crime vs. first offence This is not the case for simple internalization of the costs of an act, the injurers state of mind does not really matter they will pay whatever is required to compensate the victim.
Crime 7 B. Rational Crime Rational Amoral Person someone who carefully considers the means to achieve an illegal goal without restraint by quilt of morality. Do you ever act as a rational immoral person?? IN THIS SECTION YOU SHOULD BE THINKING ABOUT SOME PARTICULAR CRIME OR CRIMINAL ACT (a particular theft, embezzlement, price fixing scheme, fraud, etc.) AND SOME PARTICULAR INDIVIDUAL CONTEMPLATING THE CRIMINAL ACT. See Figures 11.2 to 11.4 The following should be noted: - Perfect Disgorgement is a term we saw in Contract law. It implies returning the exact amount that was mis-appropriated. (You steal $100, get caught and your punishment is to pay back the $100.) - Will perfect disgorgement act to deter a rational criminal? Only if it is 100% certain that he/she will be caught and convicted. So the answer is no. - If there is less than a 100% chance of being convicted, then the punishment if caught (must be greater than the value of the crime. All of this can be set out more formally as follows: Let x be the seriousness of the criminal act (say amount embezzled) y(x) p(x) f(x) be the expected net benefit to the criminal of committing the criminal act (the take or benefit to the criminal less any out-of-pocket expenses such as burglar tools, get-away car, fees for accountants, publicists payoffs to officials, up-front money, the discount on the value of goods charged by the fence, the cost of laundering the profits, etc.) be the probability of being caught be the punishment (fine, prison sentence, etc.) if caught Then, the expected profit from the criminal act (net take less the expected cost of punishment) is given by, y(x) - p(x)f(x)
Crime 8 where, y > 0 increases as the seriousness of the crime increases p > 0 the more serious the crime the more resources (police, auditors, prosecutors, courts, prisons, parole officers, etc.) society will devote to catching, convicting and punishing the criminal y > 0 the more serious the crime the harsher the punishment From the criminal s perspective he/she should equate the marginal benefits of the crime to the marginal costs of being caught and punished. This is done if the following condition holds, y (x) = p (x)f(x) + p(x)f (x) where y (x) p (x)f(x) p(x)f (x) is the increase in the benefit of the crime as x increases is the increase in the prob. of being caught and convicted as x increases (multiplied by the punishment if caught) is the punishment if caught multiplied by the increase in the increase in severity of punishment as x increases Note in Figure 11.3 in your text the above condition yields a negative return [y(x) < p(x)f(x)], so the crime is not committed. In Figure 11.4 the condition holds at a point for which the expected return [y(x) > p(x)f(x)], so the crime is committed. From Society s perspective, how to deter crime (lower crime rates)? 1. Decrease y(x), the net returns to a given criminal act. Make crime more costly for the criminal to undertake (higher fences, more complicated alarm systems, more secure safes, more complicate financial reporting systems). In general make the criminal work harder for his/her reward. 2. Increase p(x) by increasing the number and efficiency (equipment, training, etc.) of police, auditors and prosecutors. Give police, auditors, prosecutors more political/legal power to investigate and prosecute suspected criminals. (devote more resources and give up some personal freedoms of all citizens). 3. Increase f(x), the punishment if caught (higher fines, longer sentences, etc.) In general this requires more resources (prisons, etc.) since fines are not enough in any cases (poor criminals, really
Crime 9 big crimes). Consider the following and how the above model explains/predicts the impact on criminal activity: 1. Can a thief give good title? In Canada if you buy a stolen good, without knowing it is stolen, and it is found to be stolen you must give it back. In Europe, if you buy a stolen good, without knowing that it is stolen, and it is found to be stolen, you need not give it back. What effect do these alternative rules have on the expected value of theft? 2. In response to recent terrorists attacks, North American government have attempted to decrease y(x) and increase p(x). That is they have tried to decrease the returns from terrorism and increase the probability of terrorists being caught and convicted. In what ways have you personally paid some of the costs of the attempt to decease terrorism? 3. Does poverty cause crime; yes and no. Poverty does not generally cause tax fraud, price fixing or major financial frauds. Poverty (a downturn in the level of economic activity or a skewed distribution of wealth - very poor people living among very rich people) might lead to more theft, muggings, embezzlements, etc. If you think more carefully about y(x), the net benefit that a given criminal gets from a given crime, then it is clear that in general, the opportunity cost of criminal activity falls as other more legitimate economic options deteriorate (the economy goes into a downturn, you lose your job, the relative returns from crime increase). What disparities in income - a group of rich people living next to a group of poor people? Why would relatively wealthy groups be suspicious of (paranoid about) travelling poor people - Gypsies (What is the PC term ROMS?)? You must be very careful about how you pose and answer this question. Does poverty, or unemployment cause people to be bad, become less moral? This is not what the above model implies, rather, it implies that as economic conditions deteriorate, we might expect that some relative prices (wages) began to change and crime becomes a relatively more profitable activity. Can wealth cause crime? Are some crimes positively related to income? 4. More police should lead to less crime but so do more efficient courts (quicker and more certain conviction) and longer prison sentences. What does the above model imply about the allocation of a fixed criminal/justice budget across police, courts and prison? 5. Why is it that local police forces apparently waste their time on public education programs encouraging crime prevention for braking and entering, theft from autos, muggings, etc. but when one of these crimes actually occurs they wont really do much? Continue on with examples
Crime 10 First Law of Deterrence - increase pf What about irrational individuals? - consider Mental Institutions, rats (from textbook), children Ignorant individuals? In general the above model makes provides a very good formal framework within which a discussion of crime can take place. It provides qualitative (if not somewhat obvious) predictions concerning the incentives and dis-incentives associated with criminal acts. BUT what is really important are the quantitative answers [More police should lead to less crime but so do more efficient courts (quicker and more certain conviction) and longer prison sentences. Should resources be transferred from courts and prisons to police?] Criminals generally have incomplete information concerning y(x), p(x) and f(x). But so does everyone else when they make an economic decision. Criminals are likely not risk neutral. Non-monetary rewards and punishments can easily be allowed for. Recall y(x) should be thought of as the net reward of the crime (excluding punishment). All sorts of costs and rewards can be included - productivity (basic skills, experience, networking...) - disutility (shame, guilt, family reputation...) - opportunity costs (employment, reputation, future employment, career...) parole repeat offenders and level of punishment??