CRIMINAL JUSTICE

Edited by.

J. Roland pennock, Swarthmore College

and

John W. Chapman, [Jniaersity of pittsburgh

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New York and London.New york University press, lggS

11

ON THE ECONOMIC THEORY OFCRIME

ALVIN K. KLEVORICK

l INTRoDUCTION

At the end of his interesting and important article, "Crime andPunishment: An Economic Approach," published in 1968, GaryBecker characterized his efforts at developing an "economic"framework for analyzing illegal behavior "as a resurrection,modernization, and thereby I hope imþrovement" on the Pi-oneering efforts of Cesare Beccaria and Jeremy Bentham dur-ing the eighteenth and nineteenth centuries.l Becker hoped, atleast implicitly, to give new life and direction to cost-benefitanalysis of public policy toward crime. In this effort he surelysucceeded, as the frfteen yeais since his seminal article ap-

This chapter is a revised version of a paper prepared for presentation ât theJanuary 1983 meeting of ¿he American Society for Political and Legâl Philoso-phy in Cincinnati. I would like to thank Bruce Ackerman, Guido calabresi, OwenFiss, Joseph Goldstein, Geoffrey Hazard, Reinier Kraakman, Rick lævin, GeorgeLoewenstein, Jerry Mashaw, A. Mirchell Polinsky, Rob Prichard, Peter Schuck,Stan Wheele¡, Kenneth Wolpin, and the Legal Studies Seminar a! the UniveÌ_sity of Pennsylvania Law School for helpful discussions and for their commentson an earlier d¡aft of this chapteÌ, I am also grateftrl for the helpful researchassistance ofJon Pedersen. In revising the paper, I benefited greatly fiom thediscussion at the meeting and especially from the extremely thoughtful com-ments of [he commentators Jules Coleman and Stephen Schulhofer. Thesepeople, of course, bear no responsibility for any faults [ha[ ¡emain.

289

290 ALVIN K. KLEVoRICK

peared have seen the development of a substantial literature onthe economics of crime and Punishment

Nevertheless, there is a Perception, among people in law andeconomics, that except for the highly controversial empiricalwork on the deterrent effect of the death penalty, the econo-mists' literature on crime has not entered the mainstream of le-gal scholarship.2 This work seems to have remained a literatureihat is princiþally of interest to economists rather than to legalscholari, lawyers, and criminologists. In this resPect, work onthe economics of crime stands in contrast to, lor example, thework economists have done on tort law, which has genuinelyengaged the interest of torts scholars and teachers.3

In ihis chapte., I wish to suggest that the economists' litera-ture on crime manifests an incompleteness and also a lack ofconnection among its various strands. Both of these features ofthe body of work identified as "the economic theory of crime"have restricted the impact that economists' contributions havehad in this area. Moreover, these problems reflect an inherentlimitation of any economic theory of crime: any such theory mustdepend on, and simultaneously be confrned by, a set of politicaland legal presuppositions. Furthermore, I believe thát an un-derstanding of this inrinsic constrâint on the economists' aP-proach to crime will make possible a better appreciation of thekinds of contributions and the scope of the contributions econ-omists can make in this area. Strengths sometimes appear moreclearly when inherent limitations are recognized.

2. Tns SrnucrunE oF THE Ll.rsne.rur¡I shall frame the discussion in a general description of the

work that has been done on the economic theory of crime.a Myintent is to describe the contours of the landscape or the topog-raphy of this vast literature rather than to Provide a thoroughsurvey or critical review of it. This literature is comprised of threedistinguishable strands. I shall discuss each of these strands inturn and draw out the relations among them as I proceed.

A. The Ind.iai.d'tnl's Decision About Criminøl Actöaity

The first branch of this literature applies the microeconomictheory of chòice under uncertainty to the decision process of

On tlæ Economic Theory of Crime 291

the individual criminal. For the most part, this set of papers viewsthe potential criminal as a rational actor who balances the costsand benefits, uncertain as they are, of his possible actions andallocates his time to legal and illegal activities accordingly.s Thcsemodels analyze the choice of whethei or not to commit a crim-inal act with its potential gain and its potential cost in the formôf punishment, where the probability of winning or loiing thegamble is determined by law-enforcement agencies' success incatching, convicting, and punishing criminal actors. The litera-tüie also models the potential criminal's "labor allocation" be-tween legitimate and illegitimate âctivities. The kinds of resultsthat emerge take the standard form of the economist's compar-ative static conclusions about how changes in one or more pâ-rameters-for example, the probability and severity of punish-ment-affect the actor's choice. The perspeclive ernphasized bythe models is tha¿ the potential criminal responds, as others do,iñ a rational way to the incentives provided by the environmentin which he operates.

In some analytical studies of individual criminal behavior theauthórs are attentive to the (perhaps) problematic nature of theassumptions about rationality and information concerning therisks presented by the criminaljustice system. For example, PhilipCook suggests bringíng to bear the literature on boundr:drationality6 and rules of thumb or "standing decisions" in anal-yses of crirninaì behavior. Cook also treats in greater detail howthe threats that the criminal justice system poses for the crimi-nal are communicated to the actor through the media, the vis-ible presence of enforcers (for example, police), and personalexperience and observation.T Other analyses of the criminal'schoice processs emphasize the importance of nonpecuniary as-pects of the criminal's decision. They show, for example, theproblems with postulating that monetary equivalents of somefo¡ms of punishment exist and the assumptions that one mustmake in deriving such equivalents. They also note that becauseiìlegal activity is time-consuming, the criminal's decision musttake into account effects on things other than wealth. Theseconsiderations lead these authors to focus on labor allocationmodels that take account of both pecuniary and nonpecuniarycharacteristics of the potential outcomes that the criminal faces.Fìnally, some students of individual participation in criminal

292 aLvIN K KLEVORICK

activity are attentive to the organizational or market environ-

-.ìi'íliÀ- which individual dicisions are made Particular ex-

"ïpi. i"äi"a" s;san Rose-Ackerman's work on corruptione and

Pet'er Reuter's work on organized crime l0

B. Criminøl J ustice PolicY

While some of the literature on the economic t^^eory of crime

fo.,l.., on cost-benefit calculations of individuals-the Poten-;i"ì-;;i"ti;"È" second strand is concerned with cost-benefit

un"luti. .t, the social level. Research on the latter' with Becker's

ìöãií rt*r. being the first formal treatmenl and still the most

.r.o*irr.nt .*"rn"pl", views "optimaì policies to combat.illegalLehavior [as'| pari of an optimal allocation of resources "' Llere

it å'ì""lt àr .åt.mic anaiysis are applied to derr¡9 results about

the sociaìly oPtimal ways to enforce the criminal law' I he Prln-dJ-f.*í oËrrr.tt polí.y analysis has been on the choice of the

"5J*¡ì-u"uiritv Lf púttitttó."t and the optimal type and se-

"ãìiiTiit""i.tt*âr,t.tþ It it assumed, in these models' that thet;ï..""ã'*".ti t of punishmerit can be set directly while the

tít:.Ã"uilr." "r p,.inirhi.,ent is determined indirectþ by society's

ã*p"nai,.it* ón police, courts, and other law enforcement re-

,otirce..lt""ôi.ã".t., charàcterization of an optimal set of policies pre-

",,ooor", a function to be optimized ln his 1968 article' Beckeriiriãil;J u, t¡. -itti-uná a general social loss functìon whose

arsuments were the damages from offenses' tbe costs ot aPpre-

i.iãt.tg "t¿ convicting oiftndtrs, and the social.cost of pun-irh-.rrË. For the mosi Part, however, his analysis proceeded

;iil;-;tt u.*.al formilation of society's objective .function'ö;il"ut,"B..ker took the social goal to be minimizatio¡ oftüe total social loss in real income from ollenses' convtctlons'

ää ì""i.rt*.t". At some poinu in the analysis'-though' he didintroiuce seneralizations-for example, an addrtlonal term.lnth. lors fuñction to recognize the sociaì loss due to "a' þost 'Prtce

äir..i-i"t,io"' ¡.tweenãffenses that are not and those that are

åi"t.J-¡" o""i"ttment." t4 That is, he recognized explicitly that

"""i.i" -âti i"."t an additional loss if two individuals who com-

äit;t ;. crime are, in the enil, treated differently' with one

being punished while the other is not'

On ,he Economi.c Thedry of Cri.me 293

Othe¡ writers have generalized the social loss function in avariety of ways. John Harris 15 introduced a term for the socialloss from wrongful punishment Then in their 1977 contribu-tion, Roy Carr-Hill and Nicholas Stern 16 suggested incorporat-ing retributive considerations-specifically, departures from the"rãtributionist target" punishment-in the term measuring thenet social cost of punishment in Becker's social loss function.But in his 1978 paper, "On the Economic Theory of Policy To-wards Crime," Stern withdrew the suggestion. He continued toargue for the importance of retribution as a determinant ofp.*irh-.nt levels but indicated that it would not be "particu-iarly helpful" to "amalgamate different criteria on nlodes ofconãuct into a grand social loss function."r? Mitchell Polinskyand Steven Shavell in specifying the social loss function in their1979 article took explicit account of the attitudes toward risk ofthose who engaged in activities for which they might be appre-hended and finèd.18 Rinally, Isaac Ehrlichre examined the im-plications of introducing three alternative elements into Beck-år's social loss function. They were terms representing equalityunder the law, avoidance of legal error, and retribution' Thesefeatures correspond to suggestions that others had previouslymade-including Becker himself, Harris, and Carr-Hill andStern-but Ehrlich's analysis of the consequences of introduc-ing them is more thorough and complete.

äll oÈth.r. variants of the social loss function share onestriking feature. The term ÌePresenting the n€t cost ordamageto socièty is, in each case, taken to be the difference betweenthe harm to society and the social value of the gain to of-fenders. That is, the utility of the offender is counted in thesocial welfare function. Indeed, in two of the more elegant andsophisticated analyses in this literature, by Polinsky and Shav-eli2o the social welfare function to be maximized is the sum ofthe expected utilities of the individual members of the society'This såems plausible in their 1979 article rvhere the analysis fo-cuses on fines-both civil and criminal-and the heuristic ex-ample is double parking. The aggregation seems more^ ques-tionable in their lãtest contribution, "The Optimal Use of Finesand Imprisonment," where the harms involved are obviouslysevere enough for imprisonment to be contemplated as a pun-ishment.

294 ALVIN K' KLEVORICK

To be sure, lhis apParent anomaly in the social t:* Itl::i?]f,", U."r, noted befoiå George Stigler' in a paper sttmulateo Dy

il.k"tb"öil and Punishm--ent: Ãn -Economic +ppt':n'-1i1

i.rito*inn closely in time upon the publication ol that worK' maoc

the samã observation He wrote that:

Becker introduces the "social value of the gaìn to of-

ä;;;tü; ,h. offense The determination of this social

ä;""ï ;;;;;pi"ined, and one is entitled to doubt its-use-

f;i;;,. u, ^n Ë*pl"natoty concept: what evidence is there

il;ï;;;;t;" a'positive value uion th' utilitv derived from

i'ilä;: 'ii'.] å' ""tl ln fact the societv has branded

lr,.'i,Jrìt'a.i"åa from such activities as illicit 2r

The subsequent Iiterature h-as never taken serious account'of,h ;;,. it is an issue to which I shall return below' though Iilü iäi"."*r""it t !'"ttio" of exactly whose gains and losses

;;'i;;;;;;;,"J' 'noutd be counied in the social welfare

function that is oPtimized''ï;;;;;. beiween the frrst two strands of th:-:S9"9Ttc.nutur¡' ãi.ri,,,. is a close one The models of.individual-be-ilitå;"ti.ìi;;;ictions about the supplv of offenses bv indi-

Ïil;i. j ihJ. individual supÞlv functions are aggregated ro

ä;;. ; ;;;¿, ,'''pptv r'."'ttiLí-also known as a deterrence

ir..ìi""-tt "t ..l.ie. íhe tottl number of offenses to the Prob-

lirii,t ""¿'.*.tity of punishment This deterrence function is

;it¿ ;;;;;iì-h! poii'v modet that is used to ol¡tain conclu-

iåttäã"ì-.orr;al'strategies to combat illegal behavior-'"'"M";.-;;;;'B".ker's moãel and the theoráical work that fol-

l.;.ä; ;;"; -.mphasized the two-way inte-raction between

;ä;J;;i v ani the policies adopted-bv-^law enforcement

"üiär,l"t. ittJ htter affeit the number of offenses at-the same

;*.;; ;. level and effects of criminal activity affect the choice

äi"""iî"i-i.i,tt. Policv instruments-the Probabilitv Î9.1':t*it' nf nrrnishment. ln technical terms' iriminal activity. and

:T'i;i ï.ìiöt"- *i'i'v ai' sim"it"n-'o"slv d".tîi1'"d'ilträË;;;li.ations foi empirical efforts to esdmate the

å#Ë; il;iln, th"t is, the åsponsiveness of offenses to

öñ;;;;iJb.. Becáuse of the interdependence between cnme

On the Econotnic Theory of Crime 295

and punishment, simultaneous-equations estimating techniguesought to be used if one hopes to unravel the deterrence effects.

C. The Existence of the Criminal CategoryThe close ties and mutual enrichment that exist between the

work on economic theories of individual criminal behavior andthe research on economic theories of the criminaljustice systemstand in sharp contrast to the lack of communication betweenthe social cost-benefit analysis and the third strand in the eco-nomics literature on crime. This last enterprise, to which littleeffort has been devoted, draws upon economic analysis to ex-plain the existence of the criminal category. It-maintains thatèconomic analysis can help to explain why we distinguish a setof acts that we call crimes-why we have the criminal law at all.The two principal (perhaps only) contributions to this Part ofthe literature on the economic theory of crime are by GuidoCalabresi and Douglas Melamed in "Property Rules, LiabilityRules, and Inalienability: One View of the Cathedral"22 and byRichard Posner in Econornic Anaþsis of Lau'23

Calabresi and Melamed use the framework developed in theirarticle to consider the use of criminal sanctions in cases of theftand violations of bodily iîtegrity. They do not believe thatproblems of detection and apprehension, which rende_r theþrobability of apprehension less than one, explain fully why_we;charge"za people who commit these acts more than the valueof what they take. They argue instead that even if every suchoffender were caught, "the penalty we would wish to imposewould be greater than the objective damages."25 The explana-tion, Calabresi and Melamed suggest, "lies in a consideration ofthe difference between property entitlements and liability enti-llements. For us to charge the thief with a penalty equal to -anobjectively determined value of the property stolen would be toconvert all property rule entitlements into liability rule entitle-ments."26 But they demonstrated earlier in their PaPer thateconomic efficiency considerations, distributional goals, and"other jrÌstice reasons" would lead a collectivity not to emPloyonly liability rules to Protect entitlements. Instead, as Calabresiand Melamed persuasively argue, the state will employ a mix-ture of properiy rules, liability rules, and inalienability rules.2?Consequently, from the perspective of their analysis,

296 ALvIN K. KLEvoRICK

The thief not only harms the victim, he undermines rulesand distinctions of significance beyond the specific case. .

Since in the majority of cases we cannot be sure of the eco-nomic efficiency of the trânsfer by theft, we must add toeach case an undefinable kicker which represents society'sneed to keep all property rules from being changed at willinto liability rules.28

Of course, the neéd for the "undefrnable kicker" applies as wellto each vioìation of bodily integrity.

The basic distinction that Calabresi and Melamed draw be-tween the criminal who robs or violates another person's bodilyintegrity and. the injurer in an automobile accident or a polluterin a nuisance case is that the criminal resorts to nonmarkettransactions when the costs of market transactions are low, whilethe driver and the polluter find themselves engaged in non-market rather than market transactions when the latter are toocostly. Posner's analysis is similar except for the singularly im-portant fact that, within his scheme, the sole reason for p.refer-iing one fotm of transacjion to another-in Calabresi'Melamedtar-t, on" mode of entitlement Protection to another-is eco-nomic efficiency, as Posner defines it' For Posner, the only de-sideratum in social policy is value maximization: the distribu-tional goaìs that form an integral part of the Calabresi-Melamedfrâmework, and the "otherjustice" reasons they discuss, receiveno weight in his analysis.

- Foi Posner, "A 'crime' is simply an act that subiects the per-petrator to a distinctive form of punishment that is meted outin a distinctive kind of proceeding," where the unlawfulness ofthe act derives from "the policy of some other body of law-thercrt law, in the case of 'the common law crimes' . . and var-ious laws regulating business and personal behavior, in the caseof. . statutory crimes."2e Under this approach, "the criminalsanction is simply a method of pricing conduct"3o and "Thefunction of the criminal law-is to impose additional costs onunlawful conduct where the conventional damages remedy alonewould be insufÊcient to limit that conduct to the efficient level."3l

Posner, like Calabresi and Melamed, shows how a probabilityof punishment that is less than one should lead to a punish-ment that exceeds the damages caused by ¡he criminal. But he

On the Economic Theory of Crime 291

also makes the stronger point that although a sanction in which¿he expected punishment cost is equal to the damage to the vic-tim is ;'adequate where the crime in question is simply the vio-lation of a regulatory statute,"32 a heavier penalty is requiredin othe¡ situations. Specifically, "if the law's purpose in prohib-iting the act in question was to channel activity into the market,i.e.1he arena of voluntary transacting,"3s then an expectedpunishment in excess of the damage in8icted is needed to in-ãuce the perpetrator to substitute a voluntary transac(ion for a

coercive óne. When market alternatives are available, the ex-pected punishment for a violation would be set equal to "theium of (t¡ the social costs of the violation and (2) the additionalcoits to the legal system of substituting coercive trânsactions formarket ¿ransactions."3a

Although Posner is not explicit on this Point, it is consistentwith his áigument that the "additional costs" under item 2 wouldinclude the Calabresi-Melamed "kicker." Of course, where thereis no market alternative-Posner offers the example of "a driverwho violates the speed limit because the opportunity costs of histime are very high"35-the penalty should be large enough toreflect the hazards the criminal creates, subsumed in his item 1,

but there would be no add-on designed to induce substitutionof a market for a legal transaction.

3. Ivplrcerlo¡.ts oF EcoNoMlc Expl-eNer:roNs o¡ rnsCnrMrN¿L CerBconv FoR THE EcoNoMlc THEoRY or Cnrv¡r'¡er-

JusrtcE PoLrcY

This third, relatively undeveloped, strand of work on theeconomic tleory of crime has severaì important implications forresearch on the economic theory of policy toward crime. First,it suggests that economists' theoretical work on cost-benefitanalyiis of public policy toward criminal activity is best viewedas a partial equilibrium approach. The insights offered by eco-nomic theories of the criminal justice system are conditional, forrhose'theories take as given the set of acts or activities that aredesignated as crimes. The results in what I have labelled theseco-nd strand of the literature on the economic theory of crimetell us how to allocate resources to apprehension and convic-tion, on the one hand, and to punishment, on the other, once

298 ALVIN K KLEvoRtcK

the crimes have been identifi ed'-{ruil'JÏ''iJiHTå;i:::il,:ithe criminal justice system-a qtÎ':- "eii'-:i.::"'.-lÍ-i, r-',".you will-would take a more gìobal peripective' lt might travc

Þosner's wealth measure, or an appropriate amalgam ol the

äH,åt-il;i;-td desiderata' or yèt another measure as tne

.ïäï' ä ;; õtimized rhe f'.'ll "'sol.'tion" would then vield

the set of actions that are optrmally to be designated' as crimes

;äi;;; optimal Probability a"ã 'euetity of punishment tor

t'îlttltlïp,t, supPose one accepted R.ecker's measu.re of the

,rài'tàiì"i-lã.t' i" 'rèul i.tcome 2s rhe relevant quantlty or con-

::; ;;ä'tt';.."nomic theorv of the criminal categorv sPeaks

il',ul"*. "t ï.ll). Then o# c"n i*agi"e solving the problern

ìiii'ä"."r..' p.*a î:. ":'1,:l'1., o"'.îiÌn::*f,:l"T'il:*'å:criminaUnoncriminal dtvtston;.;äì;.: the rurr or general.:t"îåtî:î:::ïj;:å ä:"tr'*be the car-egorization ot acttvttrcs o-;rh,;;;;;i;;

ùrat yietdedabilitY of Punishment/severtty^the minimum minimorum ot the Beckerian social loss' function'"'äiäi.;;;'l'ut ùut Becker and those who followed htm

irä;;1,";i;;-ttonomic models of policv toward crime deltm

ii;ì;;;:"p'. or the. nroblemoþ ,'¿l'ki ä"ïå:î *'iÏ:itheir contribution' Nor ts tt I

;i."i; ;;;ì;..' than thev ought tó have' In particul':'P':lt'himself was quite clear ^uouJittt

confit'es of Èis model But the

Dardal character of these models does suggest difficulties for'one

Ti""i;il .;;ï o develop a complete economic theory ot' cnme'

ffir:::äî; 'bË"i''t r"n'iiãn of the broader problem' in

which one determrnes tne oPtimal partition "f ":lÌ:Ii:T'i'"åïîtã'""".tr-inal

categoiies as well as the optimal severtty

:ï: ï J*"ü ; i ;y***3:;î* l":f;::'ü'åi iï'änot confined to economlc val

::"J-ilüä;;';li, u*c"r^u'*i aná M'la-'d would not Then

the explanation of, or the derivation of results about' the crim-

H' jü,ä;iã!::li:,:iiîliY.;ï:,î:'.ï.iTä',fi ..'A second imPortant Potn

Melamed and Posner to""'oìtiottt' which explain the use of the

:ï;;;iä.iil", un¿ tr'"-"'o"rce allocaiion problem that

;::i.:;;ä;;" i'uut ua¿""td' concerns the function that

relates the net cost or d"t";;;-;; totitty to the number of of-

On the Economic Theory of Crime 299

fenses. This function, which is central to the overall objectivefunction in Becker's and others, analyses of public polly to_ward crime, is intended to measure the damagà or nei cosí thatsociety sustains as the result of the offenses thãt occur. But it isdifficult to see how one can assess the social damages from of_fenses unless one has a theory of the criminal caïegory. Thethrust of the CalabresiMelamed and posner

".ralyreJi, íhat "r,áct is classified as criminal precisely because the há¡m it does to

society exceeds the conventional measure of damages. To spec_ify the social loss function in a Beckerian analysis, ãne musi as_sess the costs of these additional harms and te sure rhat theyare appropriateìy reckoned in the analysis.

In particular, the socially disapproved nature of the crimi_nal's act, as Calabresi-Melamed and posner explain its distä-vored status, ¡aises serious questions about the aþpropriatenessof subtracting the criminal's gain from the harm tiråt his act doesto the rest. of_society. A theory or an explanation ofwhy certainacts are labelled criminal that provides reasons for objácting tothe particular action may also provide reasons for diícorr.rfinothe criminal's gain. Alternatively, since Becker was carefuithough others have not been. to say that what ought to be sub_tracted is the "social value of the gain to offendeÃ,,, the expla_nation of the criminal category provides a means teindeed theexplanation is required to-assess that,,social value."

Once again, I do not wish to suggest rhat Becker was not clearabout the scope of his analysis; on the contrary, he was precisein drawing the lines a¡ound what he did. As he wrore,

Reasonable men will often differ on the amount of dam_ages or benefits caused by different activities. . . Thesedifferences are basic to the development and implementa_tion of_public policy but have been excluded from my in-quiry. I assume consensus on damages and benefits andsimply try to work out rules for an opiimal implementationof this consensus.36

His analysis is fine, then, as far as it goes.The difficulty, however, is that by sening aside issues of how

social losses are assessed and by not havìng a theory of thecriminal category to inform that reckoning, Èecker,s analysis is

.È,

300 ALVIN K KLEVORICK

subiect ro characterizations th¿t make it unattractive ând seem-

ì;;üil:Þ;;i;;':ql-':l'liïå""ïï'.:ï1,ïli,ï"li::1,'1i;And the characterizatton rs 9l.""ifî uíïìri rc. sp.cifr.atly, neone that is Provided as a carrcí

writes, ,,criminal activities are an imoårtant subset of the class

äi'r.rr"ti..'irt,t cause diseconomies' with the level of criminaÌ

;:rñt,Ë;.;;;ted by the number of offenses"'3? ln further

characterizing his analysis' he says

Our analysis of crime is a generalization of the economìst's

;;ili;;ü;;;"al harm o"r diseconomies Analvticallv' the

illJ#r"å,äi-.;nsists in introducing costs of apprehen-

irir "ia .äî"t,ior,, *hi.h m¡ke the orobabilitv ol appre-

hension and conviction an lmportant áecìsion variable' and

ff ä'î; ;ffi -"": ?r tiHî;5îi,îî3 ;ffi illï,ods as well as bY monetary P::Ì ::ï',ität'u"utvtitiiv from anv otheÌ activir'v' that

oroduces external harm "nã *ht".t'irn-tt "t:,l""lrhhubl'

iy fines, the analytical differences vrrtually vanrstr'

The criminal's actions surelv have"external effects'" But it is

dtÅäùiä;;;uä""t or t'í.nin"l law vigorouslv pursuing an

ï"å.ä.i-,. .ri_e and punishmenr that ielf-consciously char-

liri'rlr.t'ri*ri " a b'at'th of the theory of external disecon-

åïìå',ïtt.rì';;; thut t*t'nd' that theory bv introducing costs

ãïloïr.n.n.io" and conviction and by taking account o-t-non-

î"i.l."tt ïäitts Legal ttrtåiutt *iíl find s-uch an approach

even less inviting if they tttuiiitt" fundamental contributiorrof;:i;ilä;;.;';; clarifving tt,e reciþrocal nature of externarrtres

;*äîtrã,ìil'; of thå uit*-ihut å"t pu"v c¿¿ö¿r the harm in

an externalitY situation'5elfhe absence of explicit concern for the origin of the criminal

;ä;;ä;';thei analvses of public Pgli:l:?*"lg:''1: "'iålìlË"".ï".,,ore, in Polinskv u"ä snuuËltt 1982 article' impli-

."i";r";; ilïtá of frnes aíd impri'o"ment are drawn from

ïi."b ;i;iã ;odel of external ãistconomies The'basic ac-

l''1"'ihïï;:;s" external t'"- it tot;"tty benefrcial and the

ï:iiî;ìr";;î;ction, which is at the heart of the analvsts' ts

ä:ïå Jtit õ"t"â utlititt of all the members of the com-

ffit.;Ïïi; ,.i''tt' ttt"t roiittttty u"a shavell derive are in-

On the Economic Theory of Crime 301

teresting and important for policy settings where both mone-tary and nonmonetary penalties can be used to control an activitythat yields social benefits but also results in harm to others. Onecan think of many such examples-analyses of public policy to-ward automobile accidents or pollution are two instances-butthe economic literature on the existence of the criminal cate-gory suggests that policy about criminal activi¿y is not amongthem.

4. THE INHEREN:¡ Lrvrr¡r¡o¡¡ o¡ Arçv EcoxovrcTueonv or Cnrv¡

The efforts to use economic analysis to explain why some actsare distinguished as crimes have yet anolher and more funda-menøl implicatìon about the kinds of insights economists, or theuse of economic analysis, can provide about criminal law. Theimplication might be viewed by some as negative because it Pointsto an inherent limitation of the economist's approach. But itseems, to me at least, that recognizing this boundary is not inany way depreciatory. Rather, it is to recognize that althougheconomics cøø indeed contribute to our understanding of crim-inal behavior and optimal enforcement policy, it cannot pro-vide a full or complete economic theory of crime. The work ofeconomists in this area must be informed by work in other dis-ciplines.

What, then, is this implication? It is that although an expla-nation of the criminal category can be stated' in economic terms,that vocabulary and mode of analysis does not, in fact, providethe substantive understanding we seek. To see this, it is helpfulto frame more generally the answers offered by Calabresi andMelamed and by Posner.

Society (or the collectivity or the state) establishes a "transac-tion structure" that stipulates the terms on which particulartransactions or exchanges are to take place under different cir-cumstances. For example, society might determine that if youand I are walking down the street, having no contact with oneanorher, and you desire my watch, then you are permitted tohave it if, but only if, we agree to a voluntary exchange of mywatch for something you have (or promise to deliver, etc.). So-ciety might also say that if the circumstances are different-for

302 aLvIN K KLEvoRIcK

examDle, as vou pedal your motorized bicycle down rhe side-

;;ìk;"; kr,á.k åe over and my watch is dest'oyedlou are

o.r-í,,.d to "have" my watch but you must pay a collectrvelyi"t ual.re for it tn Calabresi-Melamed terminology' the hrst srt-

u-"ìion-.ott.tponds to protecting my entitlement t9 mf walc!bv a property rule, while in the second setting it is protected

"í.'1" i" r li"¡itiru rule. In Posner's terms, the former exchange'ä.å*"..u,"¿, would be a market transaction while the ìatter

would be a nonmarket transaction'' Àrï to-" possible exchanges, society might impose an ab-

solute bar. In many societies (it is at least suted that) you can-

not buy my vote in the sense that you cannot pay me a ceratna*o,rnt oÎ'money in exchange for the capacity to cast my.balloti"'ãr'or"*. It iany societiãs, an individuaì cannot sell himselfi". låtaug. This iast form of regulating transactions corre-snonds to ihat Calabresi and Melanied refer to as Protectrng.åi lnii,ì.-.* to my vote and my freedom from bondage withan inaìienabilitY rule.- The reason i introduce yet another layer of economics vo-

.^bìh.v, with the term "transaction structure"'is to help us to

rn"". Ui,V..¿ the Calabresi-Melamed and Posner characteriza-ü.ït J'.ti-.. For Calabresi and Melamed' the imposition ofit . .ti-i"ut sanction and the characterization of particular acts

;;;;t-"t derives from a need to keep prppenty- rules-and ina-

iienability rules from being "changed at will" into.liability rule-s;

for Posner, it derives from a desire to induce individuals to

."lriii"r" tof"",ury transactions with one another for coercive

ones when the former are possible at low enôugh cost'--Ñot., ho*.u.r, that a soàiety that imposes the criminal sanc-

tion on individuals who engage in the selling and buying ol votes

makes it a crime to change an inalienability rule into a propertyrule or in Posner's terms, to substitute a market for a nonmar-i..i,*^*.,i.t. one can also imagine a society in which it is.de-

termined that all decisions about pollution should be made-rn a

collective setting, that is, in which all entitlements to be tree trom;;il";"t "r. õiotected by liability rules such a society mighti"ell aoplv thå criminal sanction to parties who engage ln- a

-".keì ìrãrrsa.tion in which the polluter "buys o1[" the pollu-tees. Similarly, a criminal sanction might be applied to an em-

pì.y.t *ft. hir", ,"o.k"t, at a (mutually. agreeable) wage below

On the Economic Theory of Crime 303

the legislatively mandated minimum or to a seller who sells goods(to willing consumers) for more than or less than a ìegislativelyset price. A society that would make each of these last two ac-tions a crime would do so because a liability-rule protection hadbeen converted into a property-rule protection.

In each instance, the act that is characterized as a crime in-volves the actor(s) forcing society to deal with a transaction in away in which society did not want to reat it What makes theact a crime is that the individual assaults the transaction struc-ture that has been established by society.al One could say, alter-natively, that the individual coerces societg into considering andcoping with an exchange or transaction in a way that differs fromthè mode society had chosen. Finally; one might characterize thecriminal as arrogating to himself the Power or the authority todetermine at least a part of the societal transaction structure,that is, appropriating to hlmself a power or right that societyhad reserved to itself. The criminal sanction is then a sanctionto enforce the transaction structure ¿hat society has chosen as

well as to compensate for the harms to individuals within thesociety.a2

But, then, an explanation of the criminal category-even anexplanation stated in economìc terms-requires answers toquêstions and elaboration of concepts that economic analysis is

not particularly well-suited to provide.a3 The point is not thatthe language describing the grounds for invoking the criminalsanction-for calling an act a crime-is not drawn from eco-nomics. One can, after all, describe the reasons in terms thatare much less evocative and less clearly located in another dis-cipline than are the terms "assault," "coercion," and "arroga-tión of power." For example, one could simply say that thecrimìnal acts contrary to the transaction structure society hasestablished.aa But the critical observation is that the explicationof why some acts are crimes while other are not requires an in-quiry into the legitimation of the transaction structure. It forcesone to confront questions like: Why does the collectivity havethe right to decide the terms on which particular transactionswill take place under different circumstances? Why do somerights reside in the individual while others rest with the ltate?

To be sure, one can ProPose a unified, and unitary, eco-nomic basis for determining what acts are categorized as crimes

304 ALVIN K' KLEvoRIcl(

and what probability and severity of punishment-is::s-::Î:19ili ;;ä åti-i*r "'tt If one posits that wealth maxrmrzatron'-

i';ü.ï;'.','il;i;;;ryï:l::ìîlä:ïî"ff l,îfi ï,ïi"ï';1-uated, the objective lunctlon rnü"îîit"ì. ..¡är"aljustice policv which se$ onlv the probat¡rlr-

i#:î'il;;;;tån¿ tnË p""'u'lti"' will be consistent with the

äi# öi:r ìr -,hTL ll:,;ïi.î:íii:îr:fjff'ff lï;äined as well' lndeed' determrnarlolr ur r"'i,ll]^l'L",

^c rr,l'l"äî"*r,y .r punishment will be a subordinated 'p"" :t :l,tlarser problem. ln the sotuuon to the global Problem' -it-willä?ie;"iñ"ii;;'h;'"":Ì3:11¡J.ïì."[ïffiå:i:::i'ff 'ïifor market exchanges are suoJe

li;;';'.u;;il*.,;f _':1..:iì:ì,:,'JJîììì5ï,ïî,:ÏiT'::minimize the reduction ln socli

orvnecessarilyinvokescertarnpoliticalp.es.,ppositions-towtt';tiår"..b;;';;t a right to choose a structure that str'ives to max-

i"i".ï."]itt ,;a ,¡"u¡ i¡¿;v¡¿u'ls do not have the right to restst

i'iÏi.rt""i. s".n a theory does not answer the question: wby

::'ä;;;; ;t"nsaction structure legitimate? And'ul -1lY:'rc that question l, " t'ttt"u'ylo"'poåent of att explanation of

v'¡ttu a"-a acts are treated as crimes'"'i'"";fi ,;;;;"",..f e¡:::;';;¡itri:Hl*'.ïä;:Xii:::;oorv. as I have couched tt tn e

iiJüåi,it-ï.ìitett" undertaking a microeconomic analysts

:iÏ#'t.q";t; asi precondition i certain minimum ot po-

litical and legal structure'

NOTES

l. Garv S. Becker, "Crime and Punishment: An Economic Ap-'

ã'åá.r'-," l'Pol Econ' 76 (1968): 169' 209'

t. 5.ã, iäi åxample' the ¡t¡¡v6' h' Henrv Hansmann"'The Current

sute of Law-and-Etot"'n'tí ðlttol"ttúip"'I L'E' 33 (1983): 217'

3. ä; ;^; to sav that economists' writings o'. 'Ji1" h11f 111 "'influence on ttt" *"y t"^'iui'i"* 'lhot"it

think about thei¡-sub-

iect. tt would have been A#Ãtuìt' "tttt all' for the o:tRoÌ1t'tg':f'.:i;;;:.;r; ;;;k "n the subiect to have been ignored.Bur the tn-

sishts about crime that utJyãtt n""" drawn "from-the wo¡k-of

::H;ñ;t-;;" been speciaiized and fragmented rh€ economrc

ïä;yîil;iå' * ""i "t"" ã" anvthin! like the salience of the

economic approach to to't''îr'itn nát ¡ee"n accepted as one of the

On the Econotnic Theory of Crirne 305

competing paradigms that torts scholars use in analyzing theirsubject, In torts, a scholar may reject the economic approach butmust reckon with it. This is not the case with the economic theoryof crime.

4. In keeping with the focus of this volume on theories of criminaljustice, I restrict my discussion to economists' theoretical work oncrime. The vast body of empirical work that has been informedby that theory and that has, in turn, influenced theoretical devel-opments lies outside the purview of this chapter. An interestingset of empirical papers on the economics of crime is collected inJ.M, Heineke, ed., Economic Modtk of Crim;nat Behatior (Arûs¡er-dam: North-Holland, 1978), and a useful assessment of empiricalwork on the subject is provided by Philip J. Cook, "Research inCriminal Deterrence: Laying the Groundwork for the Second De-cade," in Norval Morrìs and Michael Tonry, eds., Crime and Jus-tice: An Anmtal Revieø of R¿seú¿h, vol. 2 (Chicago: The Universityof Chicago Press, 1980) p. 2Ì l.

5. See Becker, "Crime and Punishment," Michael K, Block andJohnM. Heineke, "A Labor Theoretic Analysis of the Criminal Choice,"Am. Econ. Reo. 65 (1915):314; lsaac Ehrlich, "Participation in Il-legitimate Activities: A Theoretical and Empirical Investigation,"J. Pol. Econ. Sl (1973): 68; John M. Heineke, "Economic Modelsof Criminal Behavior: An Overview," in Economic Models of Crimi-nal Behaaior, volume I.

6. See Cook, "Research in Criminal Deterrence," p. 220. For the classicdiscussion of bounded rationality, see Herbert A. Simon, Models ofMa¿ (New York: John Wiley, 1957).

7. PhilipJ. Cook, "A UniÊed Treatment of Deterrence, lncapacita-tion, and Rehabilitation: A Simulation Study" (Durham, N.C : ln-stitute of Policy Sciences and Public Affairs, Duke University, 1979)

8. See Block and Heineke, "Labor Theoretic Analysis of the Crimi-nal Choice;" Michael K. Block and Robert C. Lind, "Crime andPunishment Reconsidered," ,1. L. Stud. 4 (1915): 241; Michael K.Block and Robert C. Lind, "An Economic Analysis of C¡imes Pu!¡-ishable by Imprisonment," I. L. Stud. 4 (1975): 479; Heineke,"Economic Models of Criminal Behavior,"

9. Susan Rose-Ackerman, Conuþl,ion: A Slui) ;n Polililal Econory (NewYork: Academic Press, 1978).

10. Peter Reuter, Disorganized Crime: Tl¿e Economics of the Vi-sible Hanl'(Cambridge: MIT Press, 1983).

ll. Becker, "Crime and Punishment," p.209.12. A related interesting literature, which can be viewed as an out-

grorvth of the early sociaÌ cost-benefrt analysis of public policy to-ward crirne, concerns the comParative advantages of private ver-

306 ALVIN K' KLEVoRICK

sus Dublic enforcement of the law The principal works are Gary

S. gl.te. un¿ George J. Stigler, "Law Enforcemenl' Malfeasance'and Compensation óf -r'nfoicers,"

7. l" s¿ud . 3 (1974): l; William

M. Landes and Richard A. Posner. "The Private Enlorcement otfaw," ¡. t. stud 4 (1975): l; and A Mitchell Polinsky' "PrivateulrsurþuUli. f.tfo.cement of Fines,"rl ¿ S¿r¡1 9 (1980): l0S Theiranalyses rely heavily on Becker's seminal article and its progeny'in oårticulai, on th; results concerning the oPúmal probability and

ooiimal severitv of punishment. These analyses of the relative el-Ãi".v of pt¡uu,. anå public enforcement apply to legal commandseenerallv and not to criminal law alone'

rA. ?n ."utiiy, the type and severity of punishment are also set onlyindirectly. Theà may be legislative directives about sentences orñnes, for example, but therã is usually at least a residual elementof iudicial discretion in setting punishments'

t4. Be-cker. "Crime and Punishment," p l84'iS. .¡onn n. Harris, "On the Economics of Law and Ordet"' l ' Pol Econ'

78 (1970): 165t6. Roy e. óarr-Hill and Nicholas H Stern, "Theory and Estimation

in í"fodels of Crime and Its Social Control and Their Relations toðo"..fit of S..i"f Output," in Martin S Feldstein and Robert P

Inman, eds., The Econimics of Public Semices 116 (London: Mac-

millan, 1977).l?. Ñichoías H. Stern, "On the Economic Theory of Policy Towards-

ò.im",' in Heineke, ed., Economic ModeLs of Criminal Behaøior 723'p. 148.

18. i. Mitchell Polinsky and Steven Shavell, "The Optimal TradeoffBetween the ProbaLility and Magnitude of Fines," Am' Econ' Rett'

69 (1979): 880.lg, tsaac fnilich, "The optimum Enforcement of Law and the Con-

ceft of¡utti.e' A Positive Analysis," /t?¿ R.¿ ^U^.1cont

Z.{t!lZ);1,ZO. foii"tty and Shavell, "The Optimal Tradeoff"' and A Mitchell

Polinsky and Steven Shavell, "The Optimal Use of Fines and lm-orisonment," I. Pub. Econ. (forthcoming)'

2t. ãeorg";. Sti!1e., "The Optimum Enfò¡cement of Laws"'./ Pol'Econ. 18 (191O1: 526, 527.

ZZ, õ,ri¿o Catubre.i u.td A. Douglas Melamed, "Property Rules' Lia-bility Rules, and Inalienability: One View of the Cathedral"' Ham'

,: L áe,t.88 (I9?2): 1089, l124-1127.fZS\ ni.truta A. Posnsr, Economù AnøL1sis of Løu,2d ed (Boston: Little'U Brown, 19??), pp. 163-l?224. The ".ht.ge;; ìå which Calabresi and Melamed refer includes- -

*nu,"u.t m"onetary and nonmonetary penalties are imposed on the

On the Economic Theory of Crime 307

criminal. There is no assumption that the payment, if it is a fine,is used to make restitution to the victim.

25, Calabresi and Melamed, "Property Rules, Liability Rules, and In-alienability," p. I 125.

26. Ibid.27. I will discuss the substance of each of these rules in greater detail

below.28, Calabresi and Melamed, "Property Rules, Liability Rules, and In-

alienability," p. I 126.29. Posner, Ectnomic Anaþsis of Lau, p. 163.30. Ibid., p. 172.31. Ibid., pp. 163-4.32. Ibid., p. 165.33. tbid.34. Ibid., p. I66.35. rbid.36. Becker, "Crime and Punishment," p. 209.37. Ibid., p. 173.38. lbid., p.201.39. In his classic article about externalities, "The Problem of Social

Cost,"/. ¿. Ei Econ, 3 (1960): 1, Ronald Coase considers, in partic-ular, "those actions of business frrms which have harmful effectson others . . [as] a factory the smoke from which has ha¡mfuleffects on those occupying neighbouring Properties:' (p l). Hebegins the body of his argument as follows:

Tne Recrpnocel N¡lune or ,rxs Pno¡LsvThe t¡aditional approach bas tended to obscure the natule ofthe choice that has to be made. The question is commonlythought of as one in which A inflicts harm on B and what hasto be decided is: how should we restrain A? But this is wrong.We are dealing with a problem of a reciprocal nature. To avoidthe harm to B would inflict harm on A, The real question thathas to be decided is: should A be allowed to harm B or shouldB be allowed to harm A? The problem is to avoid the moreserious harm . . .(p. 2).

40. Polinsky and Shavell, "The Optimal Tradeoff," p. 21. In addition,"it is assumed that each individual is equally likely to be the victimof someone else's harm" (ibid.). This latter assumption, which ismade for reasons of analytical tractability, is common in other areasof law and economics, too, for example, the analysis of aÌternative

ALVIN K. KLEVORICK308

Iiabilitv rules in torts. Whether ot not the assumPtion is plausible

;;;;;;.ì;;..ttext. it calls lor careful scruriny itr a model ana'

irrirn f"* "tfo*.-ent policy lt is clear that all the ¡esults in the-

üåii^"tli "* sï""." coitribútion are ¡obust to some relaxation of;;;tì;;;; ".' for example' if different individuals can h¿ve

äiif.*niá*"g"totsly given þrobabilities ot suffering h3l- Ho.*

ä. ..ìtr,. -"iù u. áltittd ii o"t *"nt further and had the prob-

äititu oi.urr..ing harm depend on wbether or not one engag€d

t"'il: ;;-;E.idering aitiviry is another.matter' The conclu-

sions about 1l) ihe optimal punishment-be it a hne or rmprrson-

ä"ìì-*rt.i átry ",,L typ" åf putti'h-ent is used and when the¡e

;. åniu on" *"ut,ít class and (2)-the desirability of using frnes to the

-"*i*u- feasible extettt before imposing nonmonetary Penal¡les'do not depend on the exogeneity o[ the probabrllty oI Delng

irrmed. Bìt when the likelihood of being harmed rs endoge-

iå"tiiä.i*^..¿, some of Poli'sky and Shavell's statemens.abo¡rt

,rrrdeadetara"naa aa,d overdeter¡ ence and some ol llìe¡r results rorthe two-class model may require modification'

¿r. ìî,1"".år.-or theft. the cri¡ninal not only challenges the way in

which society has chosen to Plotect an entitlement but also over-

turns the plácement of the entitlement itself42. îi;;" ;;;.. include the damages due to violation of what Cala-" ur.til.ã"liaamed call moraliíms see Calabresi and Melamed'

;;;".;; Rules. Liabilitv Rules. and Inalienability"' pp llll-2riJ'.ãão.tt.urion is "páid" to society As noted before (see note

24). therË is no assumption that monetary Payments' lt thete are

,nn. uae us"d to make restitution to victims'¿g. Ëiåtãrnists haue, for example, never shed much lighr on lhe con-

cepl of coercion, despite the fact that lhe term is otten lnvoKeo

;;;"-;;; ;i,É..oårcion involved in.Sovernmental"interventionin the market while others speak of the coercion ol the marKet

itself.a+. aîììt .".ting issue, but one that I do not address here' is whethcr^'

"ìi'.ti-.t *,iue usefully described as acts that are contrary to the

chosen transaction structure For example' can one' withor¡tsrrairìins language, describe the act of perjury by saylng that tne

p.¡,rroi rotå. õciety to deat with a transaction in a way that so-

cietv did not want to treat lt? If all acts that we characterize as

criáinal cannot be described in this language---or' more.gener-

"ttv, uti.tg the vocabulary of economics-then it is clear that tne

;;.-;i'.t economic theory of crime is necessarily limìted My

åì.I*tø" "ppfi.t only to thãse crimes that the economic theory

of the criminål category purPorts to explain'45. ;;iÃ;'ilto*. or'tni! åi"t'."tiott' I assume øguend'o that weakh

On the Economic Theory of Crirne 309

maximization can be given a clear, substantive, and commonlyagreed upon defrnition. That providing such a deÊnition is not astiaightforward task is attested to by the pages of controversy aboutit in the larv-and-economics literatu¡e. The point that follows ap-plies if, for example, one takes as the criterion the maximizationòf the total value of all goods and services the society produceswhere quantities are valued at the equiìibrium prices, or if onesubstitutes utilitarianism for wealth maximization.