Economic Analysis of Crime: Part I

Conflict, Crime and Violence

Crime is the number one societal concern today in Latin America and the Caribbean, and the region has the highest crime rate in the world (Jaitman, 2015). So it seems to us a good idea to briefly review what constitutes the economic analysis of crime. The basis of this analysis supposes that criminals are individuals who act rationally, like any other individual, and that they look to maximize their well-being. What distinguishes them is that they find it optimal to conduct illegal activities. In other words, criminals measure in monetary terms the incentives associated with legal and illegal activities, and find it more profitable to devote themselves to the latter. In this context, economists posit that policies to reduce crime should respond to a cost-benefit analysis. Without a doubt, this distinguishes economic reasoning from other approaches.

The assumption that criminals are rational like other individuals implies that their activities are based on a well-defined objective. In fact, it is the presence of an objective associated with individual behavior that allows for measuring, at least approximately, an individual’s gains and losses in the face of a new opportunity. Rational behavior assumes that individuals do not seek an action dominated by (that is, less convenient than) another feasible action. Thus, the economic analysis of crime assumes that criminals are rational in the sense that they measure the costs and benefits of their actions, and that they can be dissuaded from those crimes through policies that reduce the expected net benefits from crime vis-à-vis legal activities. This distinction between the opportunity to commit crime and the propensity for criminal behavior helps us advance towards a more pragmatic rather than ideological debate about the most efficient way to control crime. It also clarifies that “soft” and “hard” approaches – which essentially refer, respectively, to preventive and punitive measures to reduce crime – can be complementary.

Economics is often described as the study of the allocation of scarce resources, and crime is one of the many social problems toward which we direct our limited resources. The key economic question with regard to the costs of reducing crime is centered on what amount of resources should be directed to combating crime and how those resources should be allocated among the different agents of the justice system, such as the police, courts, and prisons. These costs should be consistent with the benefits generated by the policy to combat crime.

Becker’s Economic Model of Crime

A rational model of crime can be posited in accordance with a cost-benefit analysis. Think of an economy with two sectors: the legal sector and the illegal sector. The benefits of committing a crime (participating in the illegal sector) can be put into two categories: pecuniary benefits and psychological benefits. An individual who commits a crime also faces the expected costs from enforcement of the law. If the individuals are risk neutral, those costs are equal to the probability of punishment multiplied by the cost of the punishment, which refers to the criminal sanction faced by the potential criminal. Therefore, the net expected return from crime, calculated as the difference between the benefit and cost of committing a crime, should be compared with the net return obtained by undertaking an activity in the legal sector, which in a simplified form could be represented by the salary that each individual earns in that sector. Thus, an individual will commit a crime only if the net expected return of that activity exceeds the net return that will be obtained if the individual devotes his or her time and resources to a legal activity.

This model implies that increasing the certainty and severity of punishment can reduce the net return to crime (by increasing the expected cost of criminal activity), and in this way modify the patterns of the incidence of crime. The model also predicts that increases in salaries in the legal sector can reduce the number of criminals, among other policy implications.

In this theoretical framework, as we mentioned, the individual takes into account the cost of committing a crime (the probability of arrest multiplied by the cost of the punishment: the sentence). If the individual is neutral to the risk, the effect of an increase in the probability of arrest or the severity of punishment, conditional upon being arrested, is the same. This implication leads to the famous Becker result that, as the government has access to methods of punishment without imposing social costs, such as fines, it will find it optimal to increase the severity of the punishment for individuals who break the law. However, it is important to note that in this model the role of detention and the severity of punishment are used exclusively for deterrence. If these factors operate by incapacitating criminal activity, then the probability of arrest and the severity of punishment can have different effects on the patterns of the incidence of crime.   

A model is a simplification of reality; the assumption of rationality upon which the model is based should not be taken literally as if in reality a criminal would make a detailed calculation of the costs and benefits before deciding whether or not to commit a crime. Similarly, an armed thief does not conduct a precise analysis of whether shooting his or her victims will affect the probabilities of being caught. But it is clear that if that action can reduce the risk of being caught without increasing the punishment, it is probable that a criminal will squeeze the trigger, ceteris paribus.

This model can also be useful to analyze the optimal punishments to reduce crime. Just as in the case of fines, the threat of prison can reduce the number of crimes by deterring possible criminals from committing crimes. However, in contrast with fines, the incarceration of criminals will also reduce the number of crimes due to the incapacitation effect, as mentioned earlier. To sum up, a criminal incarcerated cannot commit crimes outside the penitentiary environment. If incapacitation is the driving force behind reducing crime, the authorities might be interested in analyzing who should be incapacitated. 

Addictions and Rationality

Is there not an element of irrationality in illegal activities? The consumption of drugs, for example, is usually illegal and addictive. Is addictive behavior rational? At the very least, it is useful to consider this latter possibility. Before going further, however, we take note that human beings are complex creatures. Our brain is composed of multiple networks in competition with one another, each with its own goals and desires. Sometimes we make decisions impulsively, other times we make them selfishly, yet other times with generosity, and on some occasions with a long-term perspective. This, per se, does not fundamentally invalidate the model of rational choice used by the economic analysis of crime. In fact, neuroscience describes our decision-making process in the following manner: faced with a series of  possibilities, we integrate internal and external data in order to try to maximize the reward we will get from our decision, regardless of how that reward is defined (The Brain: The Story of You). Of course, our behavior seen from the perspective of the rational choice model would appear less predictable than if we would incorporate in the analysis the biological complexity in our decision-making process. It is not for nothing that our empirical models on the decisions of economic agents assume that our preferences have a random component. However, what is important from the standpoint of the social sciences is that the aggregate behavior of a population respond, at the margin, to changes in incentives as predicted by the rational choice model. Without a doubt, neuroscience can help us better understand the process by which human beings make decisions. An intelligent integration of this knowledge into rational choice models can help us expand our understanding of human behavior as well as the opportunities for available public interventions, many of which can be cost-effective.

The seminal article on the theory of rational addiction was also written Gary Becker (together with Kevin Murphy; see Becker and Murphy, 1988). This study models addiction as the implementation of an intertemporal consumption plan, designed with full certainty and perfect information. First, it is necessary to define what an addiction means in economic terms. Becker and Murphy (1988) indicate that a person is potentially addicted to a good if an increase in the current consumption of that good increases the person’s future consumption. In effect, it is generally considered that addictive goods create dependency. This means that the more an addict has consumed in the past, the greater will be the current temptation to consume. However, it is also known that addictive goods diminish the well-being of the addict. Therefore, the more an addict has consumed in the past, the worse will be the addict’s current level of well-being.

A rational addict will choose to counterbalance short-term benefits against long-term costs. However, if the addicts are indeed making these calculations – which is a strong assumption to start with – we must approach with precision how to compare future costs with current benefits. This comparison is at the heart of the economic theory of addiction. Generally, addicts are considered to be more impatient than nonaddicts (technically, addicts have less of a discount factor, which is a measure of a person’s temporal rate of preference). Similarly, it is believed that criminals, in general, think more in the short term than do individuals who are not criminals.  

The Becker and Murphy model assumes that consumers know exactly how the addictive good will affect them, and that the reason why they consume more (“become addicts”) is that this is the pattern of consumption that maximizes their discounted utility. The model also assumes that the preferences of the consumers are temporally consistent, that is, that the choice the individual makes between two future results will be the choice that is made when the future results become present options.    

An important modification of the model of rational addiction assumes that consumers do not have time-consistent preferences. A simple way to introduce this characteristic in a model is by bringing up the traditional assumption of temporal exponential discounting. An alternative model thus assumes that persons have a hyperbolic discount and, therefore, exhibit time-inconsistent preferences. This implies that individuals are relatively patient between two future periods, but relatively impatient between the current period and the following one.  Over time, the future periods become the current and following periods, and the persons with time-inconsistent preferences go from being relatively patient to being relatively impatient. In addition, some persons can recognize that they are time inconsistent, while others cannot. This generates different types of potential consumers (1, 2, and 3) of an addictive good, even when the well-being and the costs associated with their consumption are the same.  Let us suppose that individual 1, who has a time-consistent preference, decides that it is in his or her best interest to begin to consume drugs today, with the intention to stop consuming them some time in the future. Let us suppose that individual 2, who has time-inconsistent preferences and is also ingenuous, decides to take the same consumption trajectory as individual 1. However, in the future, individual 2 will find that he or she does not stop consuming drugs. In short, individual 2 is not going to follow the plan. Finally, let us assume that individual 3 also is time inconsistent, but not ingenuous: this individual is aware that his or her time preferences are inconsistent. Individual 3 would also like to consume drugs in the present, but is aware that in the future he or she will not be able to stop consuming them. Therefore, based on this individual’s capacity for self-control, we assume that the individual will decide to refrain from consuming drugs in the present. There are many ways to formally model addictive behavior. A very important model in the literature is that of O’Donoghue and Rabin (1999) that is captured in the three types of behavior in the previous example.


Addictive behavior thus can vary depending on the addict, and this can have implications for public policies. In particular, self-control appears to be a desirable trait, and in fact policymakers are considering programs on a large scale to provide incentives for self-control with the aim of improving the health and incomes of citizens and reducing crime. For example, Moffitt  et al. (2011) studied a cohort of 1,000 people from birth until 32 years of age in New Zealand and showed that self-control in childhood can predict physical health, substance abuse, personal finances, and involvement in criminal activities. Along similar lines, Heckman and Kautz (2013) examined self-control – along with confidence, care, self-esteem, and resistance to adversity, among other things – as an ability associated with an individual’s character and personality.

To exercise self-control, it is fundamental to cool off the “now” and heat up the “after” – in other words, separate ourselves in space and time from temptation that is near and focus our mind on the distant consequences. If we want to exercise self-control, we have to find ways to activate such a “cooling system” automatically.  It has been found that the use of what are known as “if-then” implementation plans has helped children and adults control their conduct. These implementation plans should be practiced both in the home and at the school, because the more we practice them and put them into practice, the more automatically they will function (see the book The Marshmallow Test by Walter Mischel, a pioneer in these studies). The development of this noncognitive skill should constitute part of the education of children.

Devising and putting into practice “if-then” plans can ensure that the “hot” system itself can expressly spark the desired response when a situation arises. Over time, a new association or habit is formed. When the “if-then” plans become automatic, they reduce the effort required to exercise control: we can trick the “hot” system and get it to reflexively and unconsciously do the work for us.


Becker, G. (1968): “Crime and Punishment: An Economic Approach”, Journal of Political Economy 76, pp. 169-217.

Becker, G. and K. Murphy (1988): “A Theory of Rational Addiction”. The Journal of Political Economy 96(4), pp. 675-700.

Eagleman, D. (2015): “The Brain: The Story of You”. Pantheon Books, New York.

Heckman, J., and T. Kautz (2013): "Fostering and Measuring Skills: Interventions that improve character and cognition". NBER Working Papers 19656, National Bureau of Economic Research.

Jaitman, L. (2015): “The walfare costs of crime and violence in Latin America and the Caribbean”. IDB-MG-354. Inter-American Development Bank.

Mischel, W. (2014): “The Marshmallow Test. Understanding self-control and how to master it”. Little, Brown and Company, New York.

Moffitt, T., L. Arseneault, D. Belsky, N. Dickson, R. Hancox, H. Harrington, R. Houts, R. Poulton, B. Roberts, S. Ross, M. Sears, W. Murray Thomson, and A. Caspi (2011): “A gradient of childhood self-control predicts health, wealth, and public safety”. Proceedings of the National Academy of Sciences 108(7), pp. 2693-2698.

O'Donoghue, T. and M. Rabin (1999): "Doing It Now or Later". American Economic Review 89(1), pp. 103-124.

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