Economic Models of Crime, Misconduct, and Deterrence

The idea that severe penalties effectively deter crime is at the core of theoretical work on crime and punishment in economics but is not fully supported by the empirical evidence. The first chapter identifies conditions under which a penalty loses deterrence power and may even exacerbate social losses. The key assumption is that the criminal can only be detected and stopped by the victim before completing the crime. It differs from the standard framework in which the apprehension is triggered after the completion of the crime. The victim in our model plays an active and critical role in deterring the criminal.The second chapter shows that a social planner can motivate security investments by imposing a fine on victims such as data controllers or processors who fail to prevent attacks. An intuitive idea is that victims considering only their own potential losses exert insufficient security effort when crimes may cause additional social damages; a punishment can internalize social losses for them. However, we find that crime’s externality has no impact on the victim’s fine at the equilibrium when the hacker is deterred. Although the hacker can always be deterred if the victim’s fine is sufficiently large, the social planner chooses not to deter the hacker when the crime’s externality is small and the expected punishment for the hacker is constrained.The third chapter considers the design of a contest in which the prize may motivate not only productive effort but also some damaging actions. The organizer must choose prizes, a limit on damaging actions, and an audit probability. We explore optimal contest design in this setting. A key finding is that when the value of contestants’ output is low it may be optimal to motivate much less effort than first best, because the prize spread necessary to induce higher effort necessitates a high level of enforcement, which is not worth the cost. When the value of output is sufficiently high it becomes optimal to offer a high prize spread to motivate effort that is substantial but still below first-best, with costly enforcement then being employed to constrain damaging actions.