Academic journal article Economic Inquiry

Integrating Market Alternatives into the Economic Theory of Optimal Deterrence

Academic journal article Economic Inquiry

Integrating Market Alternatives into the Economic Theory of Optimal Deterrence

Article excerpt


Standard models of the public enforcement of law are tractable and have yielded numerous useful insights into how penalties ought to be set. (1) Several features of the legal system, however, have proven difficult to explain within the canonical framework. For example, it struggles to explain why sanctions increase in one's criminal history in a simple and intuitive way, and the literature to date has proposed no explanation of why necessity can be a defense for some crimes--in particular, a partial defense. Furthermore, welfare analysis in the standard framework is based on an (often unstated) assumption that penalties are being used to solve a missing markets problem, which implies that some amount of crime is efficient, even from a first-best standpoint. This result appears counterintuitive for many crimes, in particular the most heinous crimes such as rape, and has been the source of much controversy in the literature.

In this article, we reconcile the standard theory with these facts. We focus on the extensively employed assumption that potential criminals face a binary choice: they can either attempt to obtain some benefit or good by committing a proscribed act or do nothing. We show that adding the option of achieving their ends via legitimate means to the choice set of potential criminals extends the explanatory power of the canonical approach with regards to these problematic issues. Our approach is theoretically attractive, as the idea that criminal activity represents a means by which criminals achieve their objectives is inherent to the rational choice approach to crime. It is natural then to suppose that in many instances criminals have the option of attaining their objectives via legitimate, voluntary channels. Furthermore, while it is clearly the case that legitimate alternatives exist for some property crimes, such as theft, we argue that this assumption is reasonable for a wide range of criminal activities.

Under the canonical approach to optimal deterrence, any increase in the penalty associated with criminal activity reduces the opportunities for engaging in involuntary or criminal transactions. This implies a loss of utility on the part of potential offenders. Consequently, optimal penalties in this setting are ones that induce "efficient crimes," that is, ones for which the benefits to the criminals outweigh the social harm. Specifically, at the optimum, sanctions are set so that the potential criminal internalizes the costs of his or her actions, much as in the literature examining tort law.

We show that when potential criminals have the option of achieving their ends through voluntary exchange, maximization of a utilitarian welfare function is equivalent to minimizing the costs of crime, which consist of the harm to victims plus enforcement costs. In the presence of an option for voluntary trade, increasing the penalties associated with crime does not necessarily create a loss of utility. Instead, an increase in the criminal sanction serves to shift activity away from criminal activity in favor of voluntary transactions. This means that the optimal penalties can and should be set so as to minimize the harm caused by crime. Indeed, and in stark contrast to the canonical framework, in the absence of costs to imposing a sanction the optimal penalty would be one which deters all crime. The presence of a voluntary alternative, therefore, suggests a role for the legal system different from the standard torts logic: to encourage the use of existing markets, however formal or informal they may be, over criminal activity.

The idea that criminal sanctions should be set so as to encourage voluntary trade was first proposed by Posner (1985), (2) who associates this function with the criminal justice system, but the idea has been considered only rarely in the subsequent literature. Cooter and Ulen (2008) also take this view, arguing that "society is, in general, better off when goods are acquired through voluntary exchange" (p. …

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