VATT-KESKUSTELUALOITTEITA

VATT-DISCUSSION PAPERS

244
MODELLING
CRIME AND
PUNISHMENT
Virn Matti *

Valtion taloudellinen tutkimuskeskus

Government Institute for Economic Research
Helsinki 2000

* 20014 University of Turku, Finland, and Bank of Finland, P.O.Box 160, 00101
Helsinki, Finland. E-mail: matti.viren@bof.fi. I am grateful to the Academy of
Finland and the Yrj Jahnsson Foundation for financial support, Tuomo
Niskanen from Statistics Finland for help in collecting the data and Jukka
Virtanen for research assistance. I would also like to thank Erkki Koskela for
helpful comments. This paper was written in 1998 while the author worked in the
Government Institute for Economic Research (VATT, Helsinki). This paper will
appear in Applied Economics.

ISBN 951-561-350-7
ISSN 0788-5016
Valtion taloudellinen tutkimuskeskus
Government Institute for Economic Research
Hmeentie 3, 00530 Helsinki, Finland
Email: matti.viren@bof.fi

Yliopistopaino
Helsinki, December 2000

VIRN MATTI: MODELLING CRIME AND PUNISHMENT. Helsinki,

VATT, Valtion taloudellinen tutkimuskeskus, Government Institute for
Economic Research, 2000, (C, ISSN 0788-5016, No 244). ISBN 951-561-350-7.
Abstract: This paper provides an extended supply of labour model which allows
for different intensities of legal and illegal (criminal) activities and in which
criminal activities may be considered both as work and leisure. Heterogeneity of
individuals is also taken into account. The model is estimated from Finnish
aggregate time-series data, pooled Finnish municipalities data and pooled
international cross-country data. With the Finnish aggregate data, a volume index
of crime is constructed and then used in testing the model. All empirical results
give strong support to the hypothesis that apprehension and punishment are
important deterrents of crime. By contrast, the role of sosioeconomic and
demographic variables turns out to be of little importance.
Key words: Crime, index theory, crime deterrence
JEL classification code: 916

VIRN MATTI: MODELLING CRIME AND PUNISHMENT. Helsinki,

VATT, Valtion taloudellinen tutkimuskeskus, Government Institute for
Economic Research, 2000, (C, ISSN 0788-5016, No 244). ISBN 951-561-350-7.
Tiivistelm: Tutkimus perustuu laajennettuun tyvoimantarjontamalliin, jossa
sallitaan sek laillisen ett laittoman (rikollisen) toiminnan harjoittaminen. Mallissa sallitaan mys se, ett rikollinen toiminta voi olla luonteeltaan joko tyt
tai vapaa-aikaa. Mys ihmisten erilaisuus (heterogeenisuus) otetaan mallia rakennettaessa huomioon. Malli estimoidaan Suomea koskevasta aggregaattiaikasarja-aineistosta, Suomen kuntia koskevasta paneeliaineistoa ja kansainvlisest (maittaisesta) paneeliaineistosta. Suomea koskevan aineiston avulla
konstruoidaan rikollisuuden volyymi-indeksi, jota mys kytetn mallin testauksessa. Kaikki empiiriset testitulokset tukevat voimakkaasti hypoteesia, jonka
mukaan kiinnijmisriski ja rangaistusten ankaruus ovat trkeit tekijit rikollisuuden torjunnassa. Sen sijaan sosioekonoomisten ja demograafisten tekijiden
merkitys osoittautuu toissijaiseksi.
Asiasanat: Rikollisuus, indeksiteoria, rikollisuuden torjunta
JEL luokittelukoodi 916

Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 An Occupational Choice Model of Criminal Behaviour . . . . . . . . . . . . . . . . 2
2.1 Individual Choice Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Aggregate Criminal Activity and Empirical Analysis . . . . . . . . . . . . . 5
3 The Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4 Estimation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Presentation of Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Interpretation of the Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Introduction

Beginning with Becker (1968) and continuing through Ehrlich (1973) and Block
and Heineke (1975), among others, economists have produced a succession of
theoretical models of individual criminal behaviour. These models hypothesize
that all individuals, criminals and non-criminals alike, respond to incentives. More
specifically, by taking the individual's "taste for crime" as a datum, if the costs and
benefits associated with an action change, the agent's choices are also likely to
change. Describing criminal behaviour in the same way as conventional economic
behaviour enables one to relate criminal behaviour to observable deterrence
variables, such as the apprehension rate and severity of punishment. Moreover,
propositions of microeconomic theory can be used to produce predictions of the
effects of various exogenous variables on illegal activity.
Existing models of criminal behaviour1 are based on the notion of a
representative agent who faces a time allocation decision in which some available
activities are legitimate and others criminal. These models can be criticized at least
on the grounds that they do not account for different forms of specialization in
criminal activities: some individuals participate only in illegal activities, some in
both legal and illegal activities and most people only in legal activities. Obviously,
one needs to explain this heterogeneity. In explaining it, one may consider
differences in individual productivity as the main distributional variable.
Alternatively, one may utilize the possibility that the time spent in criminal
activities is also considered as leisure, depending on valuation schemes, which in
turn may be different for different individuals and which obviously can explain
different levels of criminal activities.
The empirical applications of existing models of criminal behaviour are
perhaps even more deficient. Analyses based on aggregate data use very crude
measures of crime and punishment. Crime is measured with simple sum
aggregates which do not take into account changes in the nature and structure of
crime. Thus, a minor crime (eg petty theft) and a more serious crime (bank
robbery) are each counted as one unit of crime. As for punishment, most studies
use the average length of prison sentence as the main indicator. Because the
punishment menu is actually much wider and changes over time, this approach
may produce completely erroneous results. Thus, we try to overcome these
problems by constructing indices which account for structural changes.
The theoretical framework for the comparative statics is presented in section
2, and empirical results are reported in section 3. Finally, there is a brief
concluding section.

For an extensive survey of the relevant literature, see eg Heineke (1978), Taylor (1978), Brier
and Fienberg (1980), Cameron(1988) and Dnes (1996). In general, the results have been quite
mixed, although it might be safe to say that the overall evidence gives some weak support to the
economics of crime model. Unfortunately, most of the evidence concerns the United States only.
Very few studies have been carried out in other countries. For some of the few exceptions, see
Wolpin (1980), Withers, G. (1984) and Virn (1990, 1993).

An Occupational Choice Model of Criminal

Behaviour

In the spirit of Ehrlich (1973) we extend the conventional labour-leisure model so

as to distinguish between different forms of labour, some of which society labels
criminal. We start by characterizing individual non-criminal and criminal
behaviour in section 2.1. In section 2.2, we analyse aggregate criminal activity and
derive the estimating equations which are used to test the main implications of the
extended economies of crime model.

2.1

Individual Choice Problem

The basic assumptions of our model are:

1)

An individual can allocate his or her time to leisure, legal activity, e, or illegal
(criminal) activity, h. The return from legal (illegal) activity is w (r). Both
rates are assumed to be constant. There are no taxes in the model, though
obviously one can consider w to be the after-tax return, which depends on
certain tax parameter(s).2

2)

Utility depends positively on leisure and consumption (in fact, we also

assume that both are normal goods). The time allocated to criminal activity
may also be comparable to leisure, depending on a valuation partner . The
total leisure time now equals {conventional leisure + *(time spent in
criminal activities)}. If  = 1, time spent in criminal activities is equivalent to
conventional leisure and if  > 1, it is more onerous than conventional
leisure. Finally, if  = 0, it is equivalent to working time (in legal activity) in
which case we would have problems in explaining crime which does not
produce any economic reward.

3)

The amount of punishment (if the person is caught) depends on the level of
criminal activity h. To simplify things, we assume that it does not depend on
income from legal activity. All punishments are reduced to a common
denominator and expressed in money terms, ie in fines. Thus, the punishment
is expressed as s#h, where s indicates the severity of punishment.3

Although taxes are not explicitly dealt with here, this does not mean that they are unimportant. In
fact, they are potentially very important because they lower the return from legal (but not illegal)
activity. Thus, as shown in eg Koskela and Virn (1993), increases in income (as well as
commodity) taxes tend to increase crime.
This definition assumes that  given apprehension  the time spent in criminal activity (the
amount of crime committed) can be found out and the punishment is related to this finding. In
practice, this can be seen as an approximation only. Here we have the well-known problem that
fines cannot exceed total income which creates one additional restriction to the maximization
problem. In the empirical analysis, we have, however, a more general punishment variable (which
also includes other types of punishments) which partially circumvents this problem.

3
4)

There is no difference between apprehension and conviction. Although this

assumption simplifies the analysis it also causes some problems because in
the cross-country setting it creates some measurement problems (and surely
some measurement errors).

5)

An individual obtains some transfer income, A, irrespective of his or her

behaviour. Thus, also criminals get transfer payments.4

Criminal actions are actions taken under uncertainty. Uncertainty arises from the
fact that there is some probability (p) that an individual pursuing criminal activity
will be caught and if so a fine sh must be paid. If only legal activity is pursued,
there is obviously no fine, and we are back in the standard supply of labour model
(ie, p does not matter). The probability p is here assumed to be constant, which
means that it does not depend on h, for instance. Obviously, this may not be true.
Instead, one could specify p so that p = p(h,P) where P is some economy-wide
reference value for the apprehension rate. Here, we however adopt the simpler
approach with p fixed because we cannot subsequently estimate the more
sophisticated model with our aggregate and semiaggregate data.
In line with the literature, we model the decisionmaking as the maximization
of expected utility as follows:

(1)
where u(.,.) is a strictly quasi-concave utility function which is strictly increasing
in its arguments: total leisure l = (1e(1)h) and consumption c. Preferences
are thus linear in probabilities (see eg Hirsleifer and Riley 1992).
The first order conditions for the maximization of expected utility are:

(2)

and

These assumptions are clearly not in accordance with the stylized facts from various countries.
Thus, for instance, in Finland a so-called daily fine was determined in the sample period by a
simple rule: one daily fine in FIM = max {20, [(monthly gross salary/90)  8*number of
dependents in the family]}. A punishment is measured in daily fines. To assume that the
punishment does not depend on the level of income from legal activity is to emphasize the fact that
the main determinant of punishment is the crime  not the income. The assumption that transfer
income does not depend on crime is also something which is not universally true for all countries.
Thus, criminals may lose all benefits so that indeed transfer income may be zero if the individual
pursues criminal activity and is caught. In essence this means that transfer income operates as some
sort of additional punishment scheme. In several countries, as in Finland, criminal activity is not
considered a reason for cancelling social security benefits. By contrast, various social programmes
which intend to break criminal habits may even increase benefits. Here, this assumption is used
because we deal mainly with Finnish data and for the cross-country analysis we have no data (from
other countries) on alternative transfer systems.

4
(3)

where 1 = 0u[1e(1)h, A+rh+we]/0[1e(1)h], u 1 = 0u[1e(1)h,

A+rh+wesh]/0[1e(1)h] and so on. If we allow p to depend on h, the firstorder conditions would include p1 + p1 terms, which would, ceteris paribus,
lower the optimal value of h because increasing time in criminal activity would
also increase the probability of being caught.
Assuming that the second-order condition holds, the first-order conditions
indirectly determine criminal and legal labour supply in terms of exogenous
parameters, ie h = h(, A, w, r, p, s) and similarly e = e(, A, w, r, p, s).
Obviously, there are some important corner solutions which deserve
comment. The most important case is where h is zero (no criminal activity). If that
were the case, we would end up with the conventional consumption-leisure choice
condition u1 = wu2. It is easy to see that this case is obtained when  = 0 (time
spent in criminal activity is just "work"  not leisure  and w is high in relation to
r but not necessary higher unless s or p = 0. By contrast, e may also be zero with
h > 0 (individual becomes a full-time criminal). If   1 and r > w, this possibility
becomes relevant. (The exact conditions are omitted here for space reasons.)
Alternatively, one might assume that the legal labour supply, e, is given for
an individual either because of social custom (eg working-hours agreement) or
because of a binding labour supply constraint (unemployment). If e could be
assumed to be fixed, say s, this would simplify the analysis considerably. One
could then simply concentrate on the first-order condition for h and, using this as a
point of departure, derive the following comparative statistics results with respect
to the relevant parameters (assuming all the time an interior solution for h):
(4)
where the signs correspond to the signs of the respective comparative static effects
(an appendix containing the derivation is available upon request from the author).
The signs of the effects are quite intuitive and in accord with earlier theoretical
analyses. Thus, we find that the price terms w, r, p and s which make legal activity
(crime) more profitable have a negative (positive) effect on the amount of crime.
Also, the effects of the "taste for crime" parameter are intuitively acceptable: if
crime becomes more like other leisure, this obviously tends to increase crime. By
contrast, if crime becomes more like work, utility decreases and less effort is
devoted to criminal activity.
An increase in transfer income tends to decrease criminal activity. The reason
is the same as in the standard supply of labour model: increased lump-sum income
leads to lower labour supply. Finally, an increase in (exogenous) legal labour
supply tends (unambiguously) to decrease crime (and vice versa, as a part of
increased "legal" leisure is used in criminal activities). Thus, an increase in

5
unemployment, for instance, should indeed cause more crime, as is often argued
by sociologists.5
One may illustrate the nature of the solution by using a simple separable
utility function u = al + cb where a and b are constant parameters. Using an
approximation 2  2, which is true when s = 0, one ends up with the following
closed-form solution for h, given <1:
(5)

Clearly, (5) is consistent with the comparative statics sign pattern of (4). Notice
that here the apprehension rate, p, and the punishment rate, s, have equal effects,
as they indeed should have here. In empirical applications, much attention is paid
precisely to the question of whether p or s is a more important deterrent of crime.
The answer depends basically on the individual's attitude towards risk (as already
pointed out by Becker 1968).

2.2

Aggregate Criminal Activity and Empirical Analysis

If all individuals are identical, one cannot explain different occupational choices
(occupational specialization). To do that, one must assume that at least one of the
model's parameters differs over individuals. Essentially, all of them can be thought
of as differing over individuals, but the most obvious candidate is the wage rate
(productivity) in legal activity. Assuming that there is indeed a frequency
distribution, f(w), over [a,b] in terms of w, one can derive aggregate criminal
activity, H, by simply integrating over individuals:
(6)

Alternatively (and as a complementary explanation), one could assume that the

"taste for crime" parameter, , differs across individuals. Then one could simply
aggregate over the relevant distribution (possibly a joint distribution of  and w).
Unfortunately there is no way of identifying the parameter  from the data which
we have at our disposal. We can only speculate that  is related to demographic
measures like age, race, environment and so on. Thus, if we can control these
variables in the subsequent empirical analysis, we might indeed get some
information of importance on this parameter.
Aggregation clearly suggests however that distributional aspects are in
general important in explaining the amount of crime, for instance in a cross-

To model the effects on unemployment is somewhat difficult because one cannot make use of the
representative agent framework and relate unemployment directly to s. Rather, one must assume
that a fraction of individuals, say un, faces a constraint s = 0, while for the rest, 1un, s = =e > 0.
Obviously 0H/0un g 0H/0(1-e= ), although both are positive. To model the effects of un, one needs
a more detailed specification of the transfer system and the wage distribution.

6
country setting. Thus, in addition to demographic variables an income equality
measure might be a good explanatory variable for aggregate crime because it
might give information on the distribution function, f(w).6 In the subsequent
empirical analysis we do not have data for all relevant distributional measures.
Obviously, when we deal with aggregated data we face severe difficulties in
constructing them. Therefore, we also use panel data for Finnish municipalities as
a separate piece of analysis which may help to identify the effects of these
distributional measures.
Next, we discuss briefly the question of how to derive the estimating
specification for aggregate (property) crime. Basically, the solution is quite
straightforward: we take a (log) linear approximation of the supply function (6). In
practice, that is not so simple because already such closed form solutions as (5)
create some problems in linearization (to illustrate this point, the linearized form
of (5) is reported in the Appendix). We tried to overcome these problems partly by
carrying out some numerical simulations which illustrate the relative effects of
different variables/parameters (the results are available upon request from the
author). Using the comparative statistics results and the numerical simulations as a
point of reference, we specified the aggregate empirical equation in the following
way:

(7)
where the symbols have the same meanings as above except that they now refer to
aggregate (average) values. Thus, p is the apprehension rate (probability of being
caught), s the sentence (severity of punishment), e working time, w return from
legal activity, r return from illegal activity and A income transfers. Variable J here
denotes the the error term and x the (possible) demographic variables, which are
included to account for aggregation and/or the omitted taste for crime parameter.
The set of socioeconomic indicators include: rate of unemployment,
population aged 1524 and urban population, the last two in relation to total
population. In addition, a dummy variable for 1955 is included. The residual
sensitivity analysis (including tests for outlier observations) suggested that this
observation is actually an outlier. On the other hand, there is reason to believe that
the basic data are somewhat deficient for this year. Thus, a dummy variable, D55,
is introduced.7
The model obviously represents some sort of long-run relationship and hence
it may not account well for short-run changes in the respective variables.
Therefore, we must deal with the dynamic specification as well. To obtain this
specification, we take two alternative routes: first, a standard partial adjustment/
habit persistence specification (8) and second, an error correction cum
cointegration model (9). In the latter case, we use model (7) as the long-run
6

Notice here that, ceteris paribus, the distribution function f(w) also determines the number of
corner solutions. Thus, the number of non-criminals (with h=0) may depend on f(w) and hence also
on income inequality.
7

It is noted in the published reports that due to some technical difficulties part of the data for 1955
was not available.

7
cointegrating model and hence J is used as the cointegrating vector, which in turn
is substituted for the error correction term.

(8)

(9)
where EC denotes the error correction term and u the error term.  denotes the
first backward differencing operator.

The Data

The empirical analysis consists of three parts. The first is an aggregate time series
analysis of property crime in Finland over the period 19511995. The second part
is a panel data analysis of 460 Finnish municipalities over the period 19831995.
The third part makes use of international cross-country (panel) data for 13
countries over the period 19791994. Thus, in all cases the data are annual.
As for other details, the following comments may suffice. Property crime, H,
is measured by the number of offenses known to the police during the year
(expressed in log per capita terms, i.e. as log(H/N) where N denotes population).
Property crime includes both theft, aggravated theft, petty theft, auto theft and
robberies. Individual crime categories (and substitution between them) are not
analysed in this paper (see Heineke 1978c and Koskela and Virn 1995 for such
analysis). Attempted thefts (in these categories) are included. In most of the
analysis a simple sum aggregate (per capita) is used for H. In the case of Finnish
aggregate time series data, also a volume index of crime is constructed, by
weighting the time series of different crime categories by a measure of the
seriousness of crime. The seriousness of crime is in turn measured by the relative
punishment rates for 1975, ie using constant weights. The index is analogous to
the monetary indices introduced by Barnett (1980). Both the simple sum aggregate
and the volume index are displayed in Figure 1. One can see that both indices
point in the same direction although the relative scales are different and the
estimation results with these two measures turn out to be somewhat different.
Figure 1.

Property crime in Finland

9
Figure 2.

Punishment and apprehension

As for the explanatory variables, p is measured as the ratio of persons captured and
indicted to the total number of offenses known to the police. The punishment rate,
s, is measured in terms of unconditional prison sentences using different weights
for different forms of punishment. Thus, a weight of one was given to
unconditional prison sentences, 0.33 to conditional prison (probation), 1.33 to
unconditional penitentiary (ie prison with stricter conditions, which was used in
Finland until the early 1970s), 0.44 to conditional penitentiary, 0.25 to daily fines
(0.17 for 19511976). The weights are partly based on criminal law; otherwise
they were derived by interviewing a group of experts in the police and juridical
system. The punishment rates are computed for all subcategories of property
crime. These are then aggregated by using either fixed 1975 weights (number of
offenses known to the police) or by using variable weights (ie actual number of
offenses known to the police each year).8 Figure 2 contains graphs for both p and s
(s computed with fixed weights).
In the case of Finnish municipal data, we have no cross-section data for
punishments. Hence, the whole variable was omitted. With the cross-country data,
we do not have precise and comparable indicators of the punishment rate. Hence
we have to rely on two crude proxies for this variable: First, we use the number of
prisoners (including jail inmates) / total population. Secondly, we use the average

In 1992 a major change took place in Finnish criminal law. Before that, individual sentences were
handed down for all crimes and punishments were later combined into a final sentence. After 1992
just one combined sentence was given to a criminal who had committed several criminal actions.
Obviously, it is very difficult to compare the period 1992 1995 with the earlier years and clearly
there is the danger of measurement errors. The comparison here is done by comparing sentences
that apply only to single criminal actions.

10
length of the prison sentence.9 Both of the these indicators are related to all
categories of crime, not only property crime. The number of prisoners/population
variable suffers also from the problem that it does not take into account the effect
of increased crime on the number of convicts. The unconditional prison sentence
variable is in turn equally deficient because it represents only one form of
punishment. Thus, if fewer and fewer people are sentenced to prison, it may well
happen that the average prison sentence even increases for the remaining convicts
even though the "expected" severity of punishment for a typical property crime
clearly decreases. Needless to say, both of the above-mentioned measures can give
a misleading impression of the developments of overall severity of punishment
and therefore the related results should be interpreted with caution. Even in this
case, most empirical studies use such simple proxies for punishment rates. Also
the amount of crime is measured very roughly using only the simple sum
aggregate.
Finally, some comments on the rate of return variables merit note. In fact, we
need to find empirical proxies for r, w and s (assuming that e is exogenous). It is
relatively easy to measure s and w but quite difficult, if not impossible, to measure
r. We may only hypothesize that r is related to income or consumption, for the
simple reason that higher income and consumption means more opportunities for
theft and robberies. The problem is then that we have basically the same variable,
say consumption or income, to account for the conflicting effects of return from
legal and illegal activity. Then we have to interpret the coefficient of this variable
as some sort of net effect of increased standard of living. Clearly, an increase in
the standard of living shows up in both increased return from legal activity and
increased opportunities of crime. The sign of the net effect is obviously
ambiguous. The working-hour variable, s, is here measured as the average
working time in Finnish industry. However, when we use the two panel data sets,
this variable is not available and we must therefore abstain from measuring the
corresponding crime effect. Also with the transfer income variable, A, there were
serious measurement problems and we could not include the variable in the
estimating specification(s).

9
The main data source for Finland is the Finnish Crime Statistics (Statistics Finland, Helsinki). For
the international data, the main data source is the International Crime Statistics (Interpol, Lyon). In
addition, we have used the Prison Information Bulletin (Council of Europe, Strassburg). Also
national data sources have been used. The data for the economic variables come from Finnish
National Accounts (Statistics Finland, Helsinki) and the OECD National Accounts (OECD, Paris).
A more complete description of the data and data sources (as well as a printout of the data) are
available upon request from the author.

11

Estimation Results

4.1

Presentation of Results

Before estimating the final specification, we look at the results from the cointegration analysis. First, we analysed the time series properties of the key time
series, H, c, p, s and w, using the set of tests proposed, for instance, by Engle and
Granger (1987). This analysis clearly showed that all of these series are I(1),
which may not be very surprising given the time series graphs in Figures 1 and 2
(to save space we refrain from reporting these tests results here; they are, however,
available on request from the author). Next, we estimated a cointegration model,
which turned out to be a stochastic version of equation (1) except that the
socioeconomic variables were not included. The relevant estimation results are
also presented in Table 1. The relatively high values of the DurbinWatson
statistic (not to mention other cointegration test statistics; see eg Engle and Yoo
1987 and Kremers et al 1992) are clearly in accordance with the null of
cointegration. Hence, the error-correction form (8) appears to be consistent with
the data.
OLS estimation results from the error-correction and partial adjustment habit
persistence models are reported in Table 1. The OLS estimator may not be
appropriate here because of simultaneity between pt and Ht (possibly also between
st and Ht). Thus, the apprehension rate may indeed deter crime but it may also be
the case that crime crucially affects the efficiency of law enforcement activities
and thus also the apprehension rate; see Ehrlich and Brower (1987) for a more
detailed treatment of this issue. Here we try to take this problem into account by
using the instrumental variable estimator to eliminate the simultaneity bias with
respect to pt. Table 2 in turn includes results with pooled international crosscountry data. In this case, the estimating equation is the standard partial
adjustment/habit persistence specification, which takes the following form:
(10)

where the Di's denote individual country intercepts (the number of countries is 13
and the sample period is 19791994). Equation (10) is estimated using the OLS
estimator, the variance components estimator, and an instrumental variable
estimator to correct the possible simultaneity bias in terms of pt and Ht.
Finally, with the pooled Finnish municipalities data, we use a model which is
in essence similar to equation (10). As pointed out earlier, we have no data on the
severity of punishment and hence the respective variable has to be deleted,
although some sosio-economic variables may give us indirect evidence of the role
of this variable. By contrast, we have several socioeconomic and demographic
variables included in the model. Those variables are related to public expenditure
(at the municipality level, exp), the unemployment rate (un), population density
(dens), the share of votes for socialist parties (sos), population aged below 15 and
above 65 (A15 and A65), the municipality tax rate (tax) and total population
(pop). The model is estimated in the same way as equation (9), with international

12
cross-country data, but in this case we also use the least absolute deviations (LAD)
estimator to account for some possible outlier observations. Some of the 460
municipalities (eg small islands) are clearly so different that a check for robustness
is required.

4.2

Interpretation of the Results

The results can be easily summarized. With all data sets the model performs
strikingly well. The coefficients of the apprehension and punishment rate
variables, p and s, are of the expected (negative) sign and magnitude and moreover
the coefficients can be estimated very precisely. In addition, the results appear to
be very robust. Thus, changes in dynamic specification, proxy variables and
estimators leave the main results practically unchanged. Also, the standard partial
adjustment specification produces results that are very similar to the results
obtained from the errorcorrection model. Finally, the instrumental variable
estimation results, which are very similar to the OLS results, suggest that the
causality problem in terms of crime and apprehension (cf. eg Ehrlich and Brower
1987) may not be of crucial importance.10
The coefficients of pt and st suggest that criminal policy should influence both
apprehension and punishment. It not obvious which instruments should be stressed
more: the importance depends on the measurement of crime and punishment and
on the time horizon. The values of the coefficient estimates favour the
interpretation that the apprehension rate is more important. This shows up if we
take log transformations of both p and s and compare the respective (constant)
elasticities. In the case of the apprehension rate it is 0.43, for the punishment rate
0.21. If the log transformation applies only to s, the elasticity is .24 while the
semi-elasticity for p is 1.11 (a one percentage point increase in the apprehension
rate reduces crime by about one per cent; the corresponding elasticity  not
semi-elasticity  at the sample mean value is 0.46).
Estimation results also show that these variables cannot be combined into an
expected penalty variable (p*s). The corresponding F test statistic F(1,29) = 12.54,
which clearly exceeds all critical levels. If, however, the log transformation is
made for both p and s, the "only expected penalty matters" hypothesis cannot be
clearly rejected. The test statistic F(1,29) = 2.93, which only exceeds the 10 per
cent critical level. All in all, the results seem to suggest that criminals cannot be
characterized as risk-neutral but rather as risk lovers, as already suggested by
Becker (1968).
The most important fact however is that the results support the existence of
deterrence effects from both the apprehension rate and the severity of sentencing.

10
Because of deficient data (especially international cross-country data), this result should be
treated with some caution. We should however point out that if the equations(s) are estimated so
that the apprehension rate, p, is replaced by the number of cases which are solved by the police SP
(and so easing the simultaneity problem) we end up with results which are qualitatively very
similar to those with the apprehension rate variable. The instrumental variable estimate for the
coefficient of log(SP/N) (corresponding to equation 1 in Table 1) turned out to be .427 (2.14).
Moreover, if p was replaced by the number of police log(NP/N) the respective coefficient turned
out to be .624 (2.64).

13
Moreover, the corresponding effects are quite well in line with those obtained in
previous studies (see eg Dnes 1996).11
After these general comments, we ought to make some specific comments on
the different tables and data sets. First, considering Table 1, we might point out
that both estimating specifications indicate that there is not much difference
between short- and long-run results and, accordingly, the speed of adjustment is
rather high. Thus, the equilibrium is reached in almost one year. In other words,
changes in relevant policy parameters may rather quickly affect criminal
behaviour.
Second, leisure time (average working time denoted by e) appears indeed to
be an essential ingredient in the supply of property crime equation. The coefficient
suggests that a decrease in annual working hours from the current 1640 to about
1500 would increase crime by more than 20 per cent  quite a substantial increase.
The effect of consumption on crime is positive, suggesting that an increase in the
standard of living shows up predominantly in increased crime opportunities thus
leading to increased crime (for similar findings, see eg Cohen et al (1980)). The
short-run effect (see the estimate for the error correction model) is however
negative, although very unprecise. Thus, changes in income and consumption may
mainly affect crime via the return on legal activity while the long-run (level) effect
shows up more in the crime opportunities and in the corresponding returns.
What is however somewhat surprising is the fact that unemployment is not an
important determinant of crime (at least in Finland). Thus, if this variable is
introduced into the estimating model, the coefficient turns out to be negative.12
Also the other additional variables that correspond to demographic and
socioeconomic developments perform rather poorly with the aggregate time series
data. Only the urbanization variable (urban population/total population) has a
coefficient which is of correct sign and reasonable magnitude (the t-ratio is 1.40).
The sign of the coefficient of unemployment variable is negative also in the
pooled data for Finnish municipalities (see Table 3). The coefficient cannot be
estimated very precisely but even then one can pretty affirmatively conclude that
unemployment has not been a major factor in Finnish criminality. By contrast, one
may conclude that urbanization may indeed have played a role (see the density
variable). As for the soc variable, as well as the demographic variables, one may
explain the results by the "taste for crime" parameter which in Finland may reflect
the difference between the more religious and conservative Finnish country-side

11

Notice that we deal here with a completely static (theoretical) model and ignore all life-cycle
considerations, which are probably very important (cf. eg Witte 1980). Thus, eg for young
criminals, the fact they are caught (and from then on known by the police) may be much more
important than the punishment. One would obviously need panel data for individuals to get greater
insight into the importance of the dynamic effects. Recall also the distinction between
apprehension and conviction which is bypassed in our model.
12
There are various explanations for this somewhat puzzling result. In particular, one may refer to
the fact that income and consumption may already capture the effects of cyclical changes in
unemployment. Cyclical behavior of different crime categories may also differ (see eg Cook and
Zarkin (1988)). It may also be that unemployment affects crime not only via the opportunity
channel but also via criminal motivation channel (see eg Land et al (1995)). Thus interpreting the
cyclical behavior of aggregate crime is quite difficult. Finally, measurement problems in terms of
un ought to be mentioned. For further discussion, see eg Lester (1995) and Borooah and Collins
(1995).

14
and more liberal urban southern Finland. Thus, in fact, soc may also reflect
(inversely) the severity of punishment, which we cannot observe/measure nor thus
include in the model.
Finally a couple of comments might be made on the results from international
cross-country data reported in Table 2. Because the quality of the data is much
more deficient than with the Finnish data, one must accept the fact that the results
are not as precise and robust as with the Finnish data sets. Still, all the results point
in the right direction and the coefficients are of reasonable magnitude (especially
after correcting the simultaneity bias in terms of the apprehension rate). Thus, both
apprehension and severity of punishments deter crime while income (which is a
proxy for the rate of return variables and the leisure variable) has a positive effect
on crime. At least one can say that the results with Finnish data do not represent a
clear exception of a general pattern.

15

Conclusions

The results give strong support to predictions of our model and in more general
they give support to models which emphasize the role of deterrence effects and
opportunity structures of crime rates.13 There may be several reasons for this
performance. A couple of them may be recalled here. First, the model gives an
important role to the allocation of time between legal and illegal activities, and it
seems that crime also depends on the available amount of leisure time at least to
the extent that we are dealing with part-time criminals. The second reason has to
do with the data. Particularly Finnish data are reasonably good and are constructed
in the proper way. There would therefore seem to be a good case for using better
data and testing methodology to revisit the empirical tests of the economics of
crime model in other countries as well. Obviously, the results also have important
policy implications. At least they show that crime is not exogenous, ie completely
unaffected by policy actions. By contrast, quite straightforward and reasonable
policy measures have a significant impact on property crime.

13

For a more general perspective of the empirical results obtained in this paper see eg Muncie et al
(1996).

16
Table 1.

Estimation results with Finnish time-series data

(1)

Const.
Ht1/ECt1
pt
st

st
ct
d55

R2
100$SEE
DW
LM1
Dep.var
Estimator
Form

2.601
(3.51)
.344
(3.51)
.789
(3.63)
.032
(2.50)
2.150
(3.70)
.287
(2.33)
.183
(3.40)
.996
4.98
1.880
0.309
sum
OLS
level

(2)

(3)

(4)

(5)

(6)

(7)

(8)

5.567

6.901

.013
(1.22)
.829
(5.21)
1.585
(3.60)
.059
(2.42)
2.531
(3.76)
..

.208
(5.00)

2.609
(3.51)
.327
(3.24)
.886
(3.51)
.032
(2.55)
2.121
(3.64)
.305
(2.43)
.186
(3.43)

5.257

(5.18)
.194
(1.68)
1.383
(4.92)
.079
(4.81)
2.049
(3.27)
.163
(1.23)
.247
(3.90)

(9.44)

(4.75)
.038
(2.78)
3.504
(6.92)
.450
(3.46)
.238
(4.01)

.025
(2.30)
.807
(5.71)
1.212
(3.19)
.057
(2.64)
1.490
(2.55)
.120
(0.49)
.159
(4.53)

.995
5.70
1.536
..

.639
4.64
1.681
..

.995
5.67
1.987
0.047

.628
5.43
1.874
..

.995
4.99
1.866
..

.994
5.69
1.985
..

3.949
(5.44)

1.090

sum
OLS
level

sum
OLS
dif

index
OLS
level

1.659
(7.18)
.093
(6.78)
2.678
(5.26)
.209
(1.60)
.286
(4.81)
.994
5.74
1.879
..
index
OLS
level

index
OLS
dif

sum
IV
level

(4.57)
.229
(1.84)
1.236
(3.63)
.076
(4.49)
2.045
(3.26)
.143
(1.06)
.240
(3.73)

index
IV
level

Numbers inside parentheses are (unadjusted) t-ratios (heteroskedasticity adjusted t-ratios were
practically identical). The number of observations is 43. c denotes aggregate consumption (which is
used as a proxy for the rate of return variables), and d55 is a dummy variable for 1955. LM1 is
Godfrey's test statistic for first-order autocorrelation in the presence of a lagged dependent variable.
sum = sum aggregate of all kinds of larcenies and robberies, index = volume index of larcenies and
robberies. Level = level form equation (in which case the lagged dependent variable H t1 is introduced)
and dif = an errorcorrection model in first log differences (in which case the error correction term ECt1
is introduced  it has been derived from the respective cointegrating equation). In the case of the
instrumental variable (IV) estimator, the set of instruments includes p t-1 , NP = number of police and
NR = number of prisoners. All level variables are expressed in per capita form.

17
Table 2.

Estimation results with pooled cross-country data

(1)

(2)

(3)

(4)

.495
(9.70)
.022
(7.86)

.160
(1.69)

.514
(4.40)
.022
(3.68)
.046
(0.60)
.189
(1.42)

.486
(4.93)
.026
(4.49)
.094
(0.90)
.156
(0.76)

.523
(4.36)
.020
(3.40)
.020
(1.99)
.175
(1.46)

R2
DW
100$SEE

.991
1.154
7.86

.991
1.172
7.85

.987
1.140
6.31

.992
1.192
7.79

.989
1.181
5.96

.984
..
10.75

Def of s
Estimator

..
OLS

NR
OLS

NR
Weight

AS
OLS

AS
Weight

NR
VC

H t 1
pt
st
yt

(5)

(6)

(7)

(8)

(9)

.667
(8.79)
.011
(2.48)
.100
(1.86)
.287
(2.58)

.690
(4.36)
.009
(1.07)
.031
(2.27)
.231
(2.00)

.988
..
9.50

.991
1.354
8.04

.991
1.400
8.02

AS
VC

NR
IV

AS
IV

.504
.885
.868
(5.20) (33.19) (34.38)
.025 .003 .003
(4.39) (1.76) (2.13)
.036 .086 .027
(1.98) (2.96) (4.61)
.056
0.171
.154
(0.43) (2.71) (2.76)

Numbers in parentheses are t-ratios (which are heteroskedasticity adjusted according to the
bootstrapping method of MacKinnon and White 1985). The number of observations is 169. The
dependent variable is the log of larcenies and robberies per capita. NR = number of prisoners and
AS = average length of prison sentence. Weight means that the data are weighted by the square
root of population. VC denotes the variance components estimator. In both cases the fixed effect
model outperformed this random effects model according to Hausman test statistic. In the case of
the OLS and IV estimators, the model also includes country dummies (which are not reported
here). In the case of IV estimation, the list of instruments includes the lagged apprehension rate
and the alternative proxies for st.

Table 3.

Estimation results with pooled Finnish municipalities data

(1)

Const.
H t 1
pt
yt
exp
dens
soc.
A15
A65
unt
R2
SEE
DW
Estimator
Dep.var.

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

12.865
6.902 17.126 32.056 16.983 33.30
7.270 9.652
14.870 11.500
(1.69)
(0.22)
(1.05)
(0.98)
(3.64)
(0.80)
(7.63)
(6.60)
(2.71)
(1.28)
.792
.847
.714
.800
.789
.802
.792
.843
.816
.783
(40.43) (83.87) (154.24) (34.32) (22.62) (89.27) (162.16) (15.97) (65.00) (80.88)
7.986 7.808 5.760 18.568 7.267 3.965 8.811 47.961 70.168 59.149
(2.15)
(2.37)
(2.58)
(2.72)
(1.49)
(0.91)
(3.01)
(2.71)
(5.41)
(4.91)
.963
.986
.723
.105
1.338
1.450
.838
.529
1.145
1.347
(8.58)
(9.90)
(16.20)
(0.56)
(6.14) (11.20)
(14.81)
(1.75)
(8.89)
(8.73)
.111
.246
.338
2.470
.723
.934
.539
4.213
.267
.930
(0.46)
(1.18)
(2.67)
(4.24)
(2.35)
(3.45)
(3.34)
(4.98)
(1.14)
(3.34)
.207
.206
.309
.046
.303
.296
.484
.082
.261
.351
(3.94)
(7.34)
(16.38)
(1.77)
(3.72)
(8.07)
(19.60)
(2.22)
(7.32)
(8.08)
.261
.197
.245
.335
.391
.376
.403
.692
.238
.440
(3.53)
(3.70)
(6.99)
(2.71)
(4.12)
(5.33)
(9.13)
(3.56)
(3.78)
(5.68)
.104

.839
.604
.384




(0.24)
(3.63)
(0.67)
(0.60)
.336





.411
.454
.061
(0.95)
(2.70)
(0.68)
(0.12)
.258
.469
.371 1.625
.201
.441
.210
.297 1.278
.388
(1.36)
(1.79)
(3.76)
(4.11)
(2.03)
(2.47)
(3.68)
(4.27)
(1.34)
(2.47)
.753
46.41
1.786

.768
46.96
..

.751
46.79
1.776

.897
43.24
1.877

.795
59.97
1.778

.810
60.34
..

.792
60.56
1.784

.915
61.20
1.833

.682
55.42
1.832

.771
65.66
1.816

OLS
L

VC
L

LAD
L

Weight
L

OLS
L&R

VC
L&R

LAD
L&R

Weight
L&R

IV
L

IV
L&R

Numbers in parentheses are t-ratios (which are heteroskedasticity adjusted according to the bootstrapping method by MacKinnon and White 1985). The number
of observations is 5520. L = larcenies and L&R (all kind of) larcenies and robberies. y = income, exp = public expenditure (both per capita), dens = population
density, soc = percentage of votes obtained by socialist parties, A15 (A65) population under 15 (above 65)/total population and un = the unemployment rate.
Weight means that the data are weighted by the square root of population. VC denotes the variance components estimator. In all cases the fixed effect model
outperformed this random effects model according to Hausman' test statistic. The list of instruments with the IV estimator include the lagged apprehension rate,
tax, exp, pop, A15 and A65.

19

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21

Appendix
Linearization of (5)
If the closed-form solution (5) is linearized by Taylor approximation around c =
(cr, cA, cw, ce, cp, cs) we obtain

(A1)

where R1 is the residual. This can be further simplifyed (by taking into account
that the coefficients  also the term inside brackets  consist of constant terms
only):
(A2)

which is, in fact, of the same form as equation (7) in text.

Simulating both equation (5) and the corresponding approximate form (A1)
produced very similar partial effects for different variables suggesting that the
approximation is indeed reasonable good (simulation results are available upon
request from the author).