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Myopic deterrence policies and the instability of equilibria

Listed author(s):
  • Eaton, B.Curtis
  • Wen, Jean-François

We develop a general equilibrium model of crime in which honest workers face an effective tax rate on earnings, consisting of an exogenous income tax, used to pay for policing, and an endogenous crime tax, given by the proportion of their disposable income that is stolen. When there are two stable equilibria, the low crime equilibrium is welfare dominant and, furthermore, welfare is a decreasing function of the income tax rate. However, as the income tax rate is reduced, the degree of stability of the low crime equilibrium diminishes, until for sufficiently low tax rates, the low crime equilibrium is unstable with respect to any small, positive perturbation in the crime rate. Thus myopic maximization of social welfare exposes the economy to random shocks in the crime rate that can destroy the preferred, low crime equilibrium. We argue that this dilemma between economizing on resources used for deterrence and ensuring the stability of the most desirable equilibrium is a fundamental trade-off in the design of many institutions intended to control antisocial behavior, including rent-seeking, corruption and theft.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 65 (2008)
Issue (Month): 3-4 (March)
Pages: 609-624

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Handle: RePEc:eee:jeborg:v:65:y:2008:i:3-4:p:609-624
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  9. ., 1995. "Public finances and the cycle," Occasional Papers 4, The Public Enquiries Unit, HM Treasury.
  10. Eaton, B Curtis & White, William D, 1991. "The Distribution of Wealth and the Efficiency of Institutions," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 336-350, April.
  11. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-414, May.
  12. Ross Cressman & Jean-Francois Wen & William Morrison, 1998. "On the Evolutionary Dynamics of Crime," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1101-1117, November.
  13. Hamermesh, Daniel S., 1999. "Crime and the Timing of Work," Journal of Urban Economics, Elsevier, vol. 45(2), pages 311-330, March.
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  15. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
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