Academic journal article Atlantic Economic Journal

Temporal Causality and the Dynamics of Crime and Delinquency

Academic journal article Atlantic Economic Journal

Temporal Causality and the Dynamics of Crime and Delinquency

Article excerpt

Introduction

In December 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research declares that the U.S. economy has been experiencing a recession since December 2007. The peak marks the end of the expansion which has began in November 2001. One argument behind this economic crisis is that falling house prices have led to an increase in mortgage delinquencies and foreclosures, which in turn severely weaken the economy. Since house prices fall during the recession, homeowners suddenly find themselves owing more on their mortgages than the market value of their houses. At the same time, unemployment rises at a faster rate with increasing number of job losses and layoffs. This, in turn, has led to a rapid increase in the delinquency rate on mortgage payments and the foreclosure rate. According to the data from the Mortgage Bankers Association (Q2 2009), delinquencies of all loans and subprime loans increase from 5.82% and 17.31%, respectively, in the fourth quarter of 2007 to 9.24% and 25.35%, respectively, at the end of the second quarter of 2009. Furthermore, they report that the foreclosure inventory rate for all loans increase from 2.04% in the fourth quarter of 2007 to 4.3% at the end of the second quarter of 2009. The data from the Bureau of Labor Statistics (Oct 2009) shows that the unemployment rate surges from 4.9% in December 2007 to 10.2% in October 2009, hitting double digits for the first time in 26 years.

Given this economic climate and the increase in home foreclosures across the nation, there has been much interest concerning the impact that delinquencies and foreclosures may have on crime rates. Immergluck and Smith (2006) find a positive relationship between foreclosures and the violent crime rate at the neighborhood level. Feinberg and Nickerson (2002) report that an increase in the crime rate may cause an increase in the mortgage default rate. The problem with these cross-sectional studies is that it is hard to identify which way causality is working between crime and delinquency relationship. This paper tries to answer the following issues on this topic: Do the past values of the delinquency rate explain the current values of the crime rate, or does the causality work in an opposite direction? Do the past values of delinquency and unemployment rates influence violence or property crime rate? Do property values work as a link between crime and delinquency?

Even though previous studies find evidence at the neighborhood level, there is a dearth of research on the crime-delinquency relationship at the national level. The goal of this study is to examine the link between crime and delinquency with U.S. aggregate data at the national level. One of the major problems using ordinary regression techniques, as in past studies, is that crime and delinquency rates may be mutually causal in some dynamic fashion, which is very hard to model using single- equation cross-sectional modeling techniques. By applying vector autoregression (VAR), we are able to approximate a dynamic structure in which all the relevant variables are endogenous.

In view of the above introduction, the remainder of the paper is structured as follows: the next section describes the relevant literature. The following section discusses the data. The next section describes the model, regression methodology, and results. Then, the estimation results are analyzed, and the final section offers concluding remarks.

Literature Review

Unemployment and Crime Rate

The first seminal work on the economics of crime is Becker (1968), who explains that individual choice to engage in criminal activities depends upon the expected payoffs of the criminal activity, after accounting for crime related costs such as apprehension, conviction, punishment, and incarceration, versus the economic benefit of legitimate work, like a return to legal labor-market activity. Cantor and Land (1985) find a positive relationship between unemployment and crime rates when effects on increased criminal motivation are stronger than the effects on decreased criminal opportunity. …

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