Rationality and Economic

Model of Criminal Behavior

Basic Model and Extension of Basic Model
 Rational Choice

• The assumption of rational choice was very prominent in the theories

of criminal behavior proposed by Beccaria (1995) and Bentham
(1843). Bentham (1789, 1843, p. 399:)
 Two Forces
• There are two forces which determine the crime
• First force is the profit of the crime
• Second force is the pain of the punishment
• If profit > Punishment; then crime will be committed and vice versa.
• According to them ““. . . the profit of the crime is the force which
urges man to delinquency: the pain of the punishment is the force
employed to restrain him from it. If the first of these forces be the
greater, the crime will be committed; if the second, the crime will not
be committed.”
 Crime and Punishment by Becker
• From the beginning of the 20th century interest in their point of view
dwindled as a plethora of other theories were developed
• The main idea of Bentham was vitalized and modernized in the path-
breaking article on Crime and Punishment by Becker (1968)
• Becker suggests that “a useful theory of criminal behavior can
dispense with special theories of anomie, psychological inadequacies,
or inheritance of special traits and simply extend the economist’s
usual analysis of choice” (p. 170)
 Expected Utility
• He argues that criminals are like anyone else, and assumes that an
individual behaves as if he is a rational utility maximizer. As the total
outcome of a criminal act is uncertain, Becker employs the usual
assumption that people act as if they were maximizing expected utility, and
also that utility is a positive function of income.
• The individual’s expected utility E[U] from committing an offense is:
E[U] = P U(Y − f) + (1 − P)U(Y ) (2.1)
Where
• U(·) is the individual’s von Neumann–Morgenstern utility function
• P is the subjective probability of being caught and convicted
• Y is the monetary plus psychic income (i.e. the monetary equivalent) from an offense
• f is the monetary equivalent of the punishment
 Neumann–Morgenstern Utility Function
• von Neumann–Morgenstern utility function, an extension of the
theory of consumer preferences that incorporates a theory of
behaviour toward risk variance.
• It was put forth by John von Neumann and Oskar
Morgenstern in Theory of Games and Economic Behavior (1944) and
arises from the expected utility hypothesis.
• It shows that when a consumer is faced with a choice of items or
outcomes subject to various levels of chance, the optimal decision
will be the one that maximizes the expected value of the utility (i.e.,
satisfaction) derived from the choice made.
 Expected Utility
• The individual will commit the offense if the expected utility is positive, and
he will not if it is negative.
• Assuming stable preferences helps make predictions about how people will
respond to different changes. It stops analysts from making up changes in
preferences just to explain contradictions to their predictions.
• Comparative statics analysis shows that increases in either the probability
or the severity of punishment might change the expected utility from being
positive to being negative.
• For society as a whole Becker introduces a “supply of offense function”,
where the two factors have an effect on the total amount of crime.
 Expected Utility
• While Becker looked at the income and punishment for a crime separately
from other earnings, later authors, following Brown and Reynolds, use the
person's initial income as a starting point for comparison
Expected utility becomes E[U] = PU (W − f) + (1 − P)U(W + g) (2.2)
• where W is present income and g is gains from crime
• Here, the crime will be committed if the expected utility is higher than the
utility of the initial income W.
• Furthermore, it is sometimes assumed that the offender in case of
conviction might retain some gain from the offense.
• Empirical studies by Becker and others corroborated this result. As shown
by Brown and Reynolds (1973) Eq. (2.2), at variance with Eq (2.1), does not
imply such a conclusion
Extensions of the Basic Model
 Latest Studies
• New economic models of crime have been developed on the basis of the
theory of supply and theory of consumer behaviour towards the risk
• The simplest one is very similar to models of portfolio choice, where a
person’s wealth is allocated between various risky and non-risky projects
• In the economics of crime version of this model the illegal alternatives are
considered as risky mainly because of uncertainty about punishment
• Allingham and Sandmo (1972), Kolm (1973), and Singh (1973) have
constructed such models for tax evasion, where the individual is
confronted with the problem of deciding what proportion of income not to
report to the tax authorities
• At variance with Becker’s model where the income of crime is a parameter,
here the income of criminal activity is a function of the proportion of the
exogenous income not reported
 Risk-Averse v/s Risk Lovers
• Both the probability and the severity of punishment are found to deter
crime for a risk-averse person.
• For risk lovers, the effect of the severity of punishment is uncertain.
• An increase in the severity will have similar effects for illegal activities as a
wage decrease in labor supply models will have for legal activities.
• If wages decrease then workers incentive to work declines likewise if
financial incentives decrease then crime will decrease.
• Two effects obtain: (i) a substitution effect and (ii) an income effect.
• The substitution effect of a more severe punishment will consist in less
crime.
• The sign of the income effect will depend on individual attitude toward
risk.
 Risk-Averse v/s Risk Lovers
• Substitution Effect: When punishment becomes more severe, it makes illegal
activities less attractive, similar to how a decrease in wages makes legal work less
attractive. People tend to choose legal activities over illegal ones due to the
higher risk associated with crime.
• Income Effect: The impact on crime rates also depends on an individual's attitude
toward risk. If someone is comfortable with taking risks (risk lover), the income
effect of harsher punishment can be positive. In other words, they might see
crime as a way to make more money despite the risks.
• The effects of changes in the profitability of crime and overall income depend on
whether a person's risk aversion increases or decreases.
• If a person becomes less afraid of risks, they might allocate more of their income
to illegal activities, especially if the potential profits from crime are high.
 Portfolio model of time allocation: When
Time is Not Fixed
• Heineke (1978) has presented a somewhat different type of model where
the individual allocates his or her time (and not his or her wealth or
income) between legal and illegal activities.
• The individual’s income is assumed to be equal to the sum of three
elements:
• (1) exogenous income;
• (2) the monetary and monetized benefits and costs of legal activities;
• (3) the monetary and monetized benefits and costs of illegal activities.
• If convicted, this income is reduced by a factor that represents the
monetary and monetized costs of crime.
 Portfolio model of time allocation: When
Time is Not Fixed
• Here, some of the individuals may choose to specialize in either legal or
illegal activities, whereas others may choose a mix of the two.
• A marginal increase in the probability or the severity of sanctions will affect
the optimal mix of activities.
• But the impact of such an increase on an individual with specialization in
one of two will be meagre.
• Assuming free time isn't fixed (it can change), we get similar results as we
do in models where people choose how to invest their money. (portfolio
choice)
• Sometimes the risk towards attitude will increase the allocation of time to
both activities even if the returns are more from the legal activity.
 Portfolio model of time allocation: When
Time is Fixed
• Several authors, starting with Ehrlich in 1973, have looked at a different
type of model for crime.
• In this model, people assume they have a fixed amount of free time for
leisure, which doesn't change.
• This assumption means that if someone spends more time on legal
activities, they must spend less time on illegal activities, and vice versa.
• However, when they looked at how different factors affect crime, like
changes in income and the rewards for criminal activities, they found that
these effects were similar to what they saw in previous models.
• But when they studied the effects of making punishments harsher, things
became less clear.
• To get a clear picture, they needed to put further limits on some aspects of
the model.
 Extension of the Previous Model
• The portfolio model of time allocation with non-fixed leisure time has been somewhat extended
by Wolpin (1978) and by Schmidt and Schmidt and Witte (1984)
• They have introduced four possible criminal justice states, each taking place with a certain
probability.
• These new models make it harder to predict how changes in punishments, and gains or losses
from crime, affect criminal behavior.
• Surprisingly, in these models, if unemployment goes up (more people are out of work), illegal
activity tends to decrease.
• The reason is that unemployment means lower income, which makes people more cautious
(higher risk aversion).
• For people who are neither too cautious nor too reckless (risk-neutral), changes in the expected
employment rate don't affect how much time they spend on illegal activities.
• Baldry in 1974 made a model where people must decide how many hours they work legally each
week. By doing this, he found clearer predictions about how changes in punishments and
economic factors impact crime.
 Use of Utility Function
• Imagine we can't easily turn everything about legal and illegal activities
into money to understand them.
• In that case, we use utility functions. These functions help us see how
people spend their time and what they value.
• Block and Heineke (1975) came up with a model where they included a
factor that represents how long someone might go to jail if caught. They
put this in the utility function.
• But this model didn't give clear answers about how changing things like the
chance of getting caught, the rewards for legal and illegal activities, or your
overall income would affect crime.
• Without making strong assumptions about what people like and prefer, it's
really hard to say if crime would go up or down when you change these
factors.
 Change in Remuneration
• Block and Heineke found that when legal and illegal remuneration
change, it affects illegal activities.
• They used ideas like substitution (doing more of one thing if another
becomes less attractive) and income effects (how much money
affects your choices) from traditional supply and demand theory.
• But, here's the twist: this isn't exactly like regular economics.
• Even if we think illegal activities become less tempting as people
make more money (inferior), it's hard to say for sure.
• Making the punishment harsher doesn't always make crime go down
without any doubt. It's a bit more complicated.
• Witte (1980) and Schmidt and Witte (1984) looked at a simpler version of their model.
• They divided a person's time into different activities: legal work, illegal activities like
theft, legal leisure activities, and illegal leisure activities like drug use or assault.
• But, even in this simplified model, they found it hard to make clear conclusions.
• When legal activities involve risks, things get even more uncertain.
• In regular economics, we often assume people try to get the most expected benefit
(maximize expected utility). B
• ut real people don't always behave this way. Some studies have explored different ways
people make decisions, like Lattimore and Witte (1986) who looked at burglaries in risky
situations.
• Eide (1995) also tried a different approach but found that the overall results were similar
to the traditional approach.
 Summary
• Increasing the chances of getting caught or arrested decreases the amount
of crime, regardless of a person's risk attitude.
• When someone gets arrested, the impact of increasing the conviction rate
or the likelihood of imprisonment on crime isn't clear unless we make
more assumptions.
• However, if we make reasonable assumptions, we get the same results as
in the first point, supporting the idea that higher chances of getting caught
deter crime.
• For any risk attitude in Becker's model, stricter punishment reduces crime.
But for portfolio choice models, the effect of harsher penalties is uncertain,
especially for risk lovers. In most models, risk averters commit fewer crimes
when punishments are tougher.
 Summary
• In some cases, increasing punishment can actually increase crime if income effects are
stronger than substitution effects, but this depends on the specific model.
• Labor supply models with non-monetized attributes don't give clear results for changes
in various factors. For other models, the effects of changes in gains from crime,
exogenous income, and income from legal activities depend on a person's risk attitude.
• Overall, how changes in the environment affect crime depends on an individual's risk
attitude. If we assume decreasing risk aversion, monetization of psychic effects, and one
type of sanctions, the effects are clearer: higher chances and severity of punishment
reduce crime, while increased income and gains from legal and illegal activities raise it.
The reason is that, for risk-averse people, punishment affects their expected income less.
• The studies often assume a Bernoulli distribution for the probability of punishment, but
introducing a more general risk distribution challenges the standard deterrence results.
• A different model by Ormerod et al. (2003) compares crime to the spread of diseases in
populations. People can move between groups with different crime potential, and
punishment influences these movements and, therefore, the amount of crime.