Crime Causation: Economic Theories

The incentive-based model of crime has experienced significant theoretical and empirical developments. The model by Becker has been developed subsequently by Ehrlich (1973). Since at least Ehrlich there has been an awareness of a correspondence between any crime-work decision and time allocation. In the 1970s and 1980s, the influential contributions of Ehrlich (1975) and Witte (1980), among others, made this connection much more precise and the awareness more widespread. For example, Ehrlich allowed for three different criminal justice outcomes, whereas Witte utilized a model in which the time allocations between legal and illegal activities entered the utility function directly. See Schmidt and Witte for a survey of these first-generation economic models of crime.

Early studies of criminal behavior by economists can be criticized for being set in a static framework. Economic models of crime are typically estimated as static models, though there are many reasons to suspect dynamic effects matter, both theoretically through habit formation, interdependence of preferences, capital accumulation, addiction, peer group effects, and so on, and empirically through improvements in fit when lagged dependent variables or autocorrelated residuals are included in the model. Labor economists have long been interested in state dependence, the fact that activities chosen in the current period may be strongly affected by the individual's activities in the previous period (e.g., Heckman). Examples of state dependence in economic models of criminal behavior include: the effect of education today on future criminal activities; and the effect of crime in one period on future legitimate and criminal earnings. Becker and Murphy, Flinn, Grogger (1995), Nagin and Waldfogel, Tauchen and Witte, and Williams and Sickles exemplify attempts at describing a causal dynamic economic model of crime.

Flinn incorporates human capital formation in a time-allocation model. In his model, human capital is accumulated at work, not at school. Consequently, crime takes time away from work and hence diminishes the amount of human capital accumulated. The diminished human capital leads to lower future wages and hence less time spent working. Since crime and work are substitutes in his model, the decline in time allocated to work leads to increased participation in criminal activities.

Becker and Murphy build on consumer demand theory and develop a model of rational addiction. Their model relies on "adjacent complementarities" in consumption to produce habit formation. Under their model, the marginal utility of consuming a good that is an adjacent complement is higher if the good has been consumed in the previous period. They also incorporate myopia to explain why people become addicted to harmful goods.

Grogger estimates a distributed lag model to allow arrests and prosecution to affect both current and future labor market outcomes. Using data from the California Adult Criminal Justice Statistical System, he found that arrest effects on employment and earnings are moderate in magnitude and fairly short-lived. Nagin and Waldfogel consider the effects of criminality and conviction on the income and job stability of young male British offenders. Their analysis uses a panel data set assembled by David Farrington and Donald West as part of the Cambridge Study in Delinquent Development (CSDD). The authors present results which at first sight appear somewhat paradoxical. They find that conviction increases both the job instability and legal income of young offenders. To rationalize these results Nagin and Waldfogel outline a characterization of the labor market in which young men participate. The basic idea underlying the model is that young men have two types of jobs available to them—skilled and unskilled—where wage profiles are rising in the former (due to accumulation of human capital, training and experience) and flat in the latter (no training). If discounted wages are equalized across jobs, the unskilled wage would start above and end below skilled wage. Also, human capital theory suggests that job stability will be greater in skilled sector than in the unskilled sector. Given these predictions, and assuming that a criminal conviction adversely affects prospects of getting a skilled job, it is likely that conviction is associated with higher pay and higher job instability. Note that Nagin and Waldfogel found criminal activity without conviction had no significant effect on labor market performance. They conclude that this result implies stigma, rather than withdrawal from legal work, explains the effects of conviction.

Dynamics arising from the impact of private and social programs (e.g., police treatments in cases of domestic violence) have been dealt with by including the lag of the dependent variable (actual violence) and the latent variable (Tauchen and Witte). Tauchen and Witte use data from the Minneapolis Domestic Violence Experiment to determine how police treatments in cases of domestic violence (advising the couple, separating the individuals temporarily, or arresting the suspect) affect the couple's subsequent violence. Estimating a dynamic probit model for the probability of observing violence in the follow-up periods, the authors find that arrest is more effective than advising or short-term separation but that the differential effect is transitory.

In an interesting paper, Williams and Sickles provide an extension of Ehrlich (1973) by including an individual's social capital stock into his utility and earnings functions. Social capital, including things like reputation and social networks, is used as a proxy to account for the effect of social norms on an individual's decision to participate in crime. This assumes that the stigma associated with arrest depreciates an individual's social capital stock. Williams and Sickles clarify this point further by arguing that employment and marriage create a form of state dependence, which reduces the likelihood of criminal involvement. In other words, an individual with a family, job, or good reputation has more to lose if caught committing crimes than those without such attachments. Dynamics arise from current decisions affecting future outcomes through the social capital stock accumulation process. The main result is that criminals behave rationally in the sense that they account for future consequences of current period decisions.