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Chapter6.pptxChapter 6
Risk Preferences and the Supply of Offenses
Introduction
Previous chapters related deterrence to the expected punishment (product of probability of conviction and sanction)
This chapter discusses the role of risk preferences in criminal activity and presents a model that compares the effectiveness of increasing probability of conviction versus sanctions in deterring offenders
Risk Preferences and Criminal Activity
Some store clerks steal from the store while most do not. What explains this difference in behavior?
Working honestly is earns a predictive income if hours worked and wage remain the same
Stealing from the company (fraud, larceny, robbery) carries risk and is not predicative since there is a risk of substantial penalties if convicted
The difference in behavior between honest and dishonest clerks can be explained through differences in risk preferences
Risk Preferences and Criminal Activity
Relatively few individuals are indifferent between receiving earnings with certainty and equivalent expected earnings that are very risky.
Those few who are indifferent are “risk neutral”, and their behavior can be characterized by models that only consider expected return.
Most individuals are “risk averse” and choose careers with relatively certain earnings over those with the same expected value of variable earnings.
Risk averse individuals must be paid a “risk premium” in the form of higher expected earnings in order to compensate for the risk they are taking on.
Risk Preferences and Criminal Activity
Some individuals are “risk seekers” and will actually accept smaller expected earnings in order to pursue a career in which returns are variable. In other words, they receive utility from increased risk.
Risk preferences vary by individual and include many demographic factors
Risk Preferences and Criminal Activity
If the opportunity to steal from a store is presented to a variety of retail clerks, those who are risk averse are less likely to violate the law.
Risk-averse clerks will choose legal work, even if expected earnings in illegal theft are higher, as long as the margin does not exceed their risk premium.
Risk Preferences and Criminal Activity
Risk seeking clerks are likely to steal even if the expected earning are lower, as long as the return to crime is large enough to overcome their negative risk premium.
Risk Preferences and Criminal Activity
Risk preferences has implications for enforcement strategy.
If those violating the law are risk seekers, they will be more strongly deterred by increasing the probability of conviction than by raising the sanction on those convicted.
Raising the probability of conviction, increases the certainly of conviction and lowers the risk (in terms of certainty) associated with crime.
Increasing the sanction, increases the variation in return to crime, which is attractive to risk seekers!
Suppose a risk averse person is offered a salary of $50,000 with certainty or $20,000 with some probability and $80,000 with some probability
What is the utility would this person get from the certain offer?
What is the utility would this person get from the uncertain offer if there were a 50% chance of each outcome?
What must the expected income be from the uncertain offer in order for the person to be indifference between the two offers? What is the person’s risk premium for this offer?
Suppose a risk seeking person is offered a salary of $50,000 with certainty or $20,000 with some probability and $80,000 with some probability
What is the utility would this person get from the certain offer?
What is the utility would this person get from the uncertain offer if there were a 50% chance of each outcome?
What must the expected income be from the uncertain offer in order for the person to be indifference between the two offers? What is the person’s risk premium for this offer?
Suppose the state increased the sanction for committing crime. For a risk averse person, this would
Lowers the expected utility from crime
Increase the risk premium, so that a higher expected income is necessary for them to commit crime
For a risk seeking individual, an increase in sanction would
Lowers expected utility of crime, but by a relatively smaller amount
Lowers the risk premium, so that the person is willing to commit crime at a lower expected income!
Claire’s utility from income is given by . On her current job, she earns income by in legal work with certainty. Because Claire is responsible for handling significant amounts of cash, she has the opportunity to embezzle significant sums. Specifically, assume that she could embezzle an additional $2,000 so that her illegal income would be ($2,000 from legal compensation and $2,000 from embezzlement). However, if she engages in illegal activity, there is a specific probability that she will be caught and sanctioned and her income will become
What probability of being sanctioned, , will cause Claire to be indifferent between legal and illegal activity?
Assume that the sanction is increased so that . Under these circumstances, what probability of being sanctioned, , will cause Claire to be indifferent between legal and illegal activity?
