Law Enforcement: Salary or Reward?
Price theory as a source of thought experiments and unique insights
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When you learn price theory, you start to think about things differently. In particular, you start to think a lot about markets and institutions. Even basic, everyday observations lead to useful thought experiments inspired by common price theoretic insights. Some of those thought experiments are dead ends, but many are useful. Along the way, these thought experiments help you to better understand the world.
Take, for example, criminal law. A price theorist might look at criminal law and try to work through the following thought experiment. Suppose you are a criminal and I am a detective. I’m investigating the crime that you committed. I find the evidence that can put you in prison. But now think of this like we would a market or a negotiation. The cost to you of going to prison is probably quite large. The benefit to me of putting you in prison is mostly in the form of occupational accolades. Maybe I get a promotion (now, or in the future). This means that there is an increase in the present discounted value of my lifetime earnings. I might also get some form of non-monetary compensation in the form of my enhanced reputation or some (higher) level of prestige.
However, the cost to you of going to prison is almost certainly greater than the increase in the present discounted value of my income. Unless I care a lot about my reputation and prestige, there are possible gains from trade here. You could offer to pay me to destroy the evidence that I have — and you would likely be willing to pay me more than the increase in the present discounted value of my future income.
This sort of thought experiment can take one in multiple directions.
One might be tempted to conclude that these potential gains from trade are precisely why we don’t allow markets to enforce the law. Instead, law enforcement tends to be provided by the state.
As Gary Becker and George Stigler point out, in a world of perfect monitoring, paying law enforcement agents a salary equal to the next best alternative would be sufficient to get effective law enforcement because malfeasance or insufficient effort would result in dismissal. That provides a sufficient level of market forces to produce the desired outcome. Of course, we don’t live in a world of perfect monitoring. Thus, additional market forces might emerge. This isn’t hypothetical. Stories of bribery and corrupt law enforcement officers make news with some degree of regularity and dominate dramatic television shows (which might or might not exaggerate the extent to which such behavior is observed in the real world).
Becker and Stigler suggest that one solution to the monitoring problem would be to offer law enforcement agents what have come to be known as efficiency wages, or wages significantly above the next best alternative. Given imperfect monitoring, law enforcement agents would only be caught with some positive probability. Paying them an above market wage would imply a permanent loss in income in the event that their malfeasance was detected and they were dismissed.
However, even this gets complicated quite quickly. For example, one might think that there is a simple trade-off between the wage premium and the probability of detection. The lower the chances of getting caught, the higher the wage premium would need to be. The greater the chances of getting caught, the lower the wage premium would need to be. But it is not that simple. Although it is true that a low probability of detection would require a higher salary, it is also true that there could be a dispute over whether the agent deserved to be dismissed. There might be some degree to which the agent’s malfeasance is in dispute. If that is the case, law enforcement agents are likely to be more litigious as their wage premium rises.
Or, the state could go a different route. It could recognize that some degree of malfeasance is going to happen as a result of imperfect monitoring. Taking that as given, the state might offer a lower salary to law enforcement than the next best alternative. The resulting malfeasance would then act as a compensating differential.
Alternatively, one could go in a completely different direction. One might argue that the gains from trade that exist between the criminal and the law enforcement agents are a reason to argue in favor of market-based law enforcement. The extra layers of law enforcement necessary for monitoring might be costly or even wasteful.
Becker and Stigler suggest that one could eliminate salaries for law enforcement and simply pay people by piece-rate, or reward. The system would work as follows. A crime would have a fine associated with the damage done to the victim divided by the probability of conviction. The law enforcement agent would then be paid an amount equal to the fine. This sort of scheme would incentivize private law enforcement agents while also punishing criminals. In addition, the fine itself would have the typical disincentive effect associated with any effective law enforcement. Finally, this should also reduce the incentive for malfeasance since it eliminates any gain from trade between the criminal and the law enforcement agent.
One might be concerned that this would lead to arbitrary and capricious enforcement, or otherwise enforcement against innocent people. This private system could require the full compensation of people acquitted of charges by the law enforcement agents who bring the charges.
While this idea is intriguing, it has been subject to a number of criticisms, most notably by William Landes and Richard Posner. For example, it is possible that the fine required to deter crime differs from the price required to enforce the law. This could be the case since the private providers of law enforcement are likely to generate a positive externality in the sense that their successful actions are likely to reduce the amount of crime that takes place. However, private law enforcement doesn’t necessarily have a way to internalize that externality since they cannot profit from the crime that doesn’t get committed as a result of their successful enforcement of the law.
Another criticism of Becker and Stigler is that they simply reinvented tort law. For example, if the property rights to the damages from the crime are assigned to the victim, then the victim can attempt to enforce the law and collect the corresponding fine. Alternatively, the victim could hire a law enforcement agent or sell the rights to the damages to a law enforcement agent. Regardless, the ability of the victim to seek compensation for damages is just a tort. Thus, this serves to re-frame the question as to why criminal law in practice is distinct from torts — or whether it should be.
Nonetheless, it might be interesting to actually consider whether there are historical examples in which the Becker-Stigler proposal was implemented in practice. If not, this strongly suggests that there is something missing from the analysis. But, if such systems did exist in the historical record, then it is possible to consider how these systems performed and whether there are any lessons for why no such systems appear to be in place in the modern world.
David Friedman argued, first in a paper and later in a chapter of his book on legal systems, that Iceland actually had a private system of criminal law — at least that is what is described in the Sagas. As Friedman acknowledges, some of the details are in dispute given discrepancies in historical sources. Nonetheless, we do know a few things about this system.
When a crime was committed, the prosecution was left to the victim (or the victim’s family). There were three types of punishment, depending on the severity of the crime: full outlawry, less outlawry, or a fine. Full outlawry meant that the criminal was considered an outlaw and his property was confiscated and given to the victim (or the victim’s heirs) as well as the outlaw’s own dependents. If anything was left over it went to the prosecutor. Lesser outlawry meant that the perpetrator could leave Iceland and return after a period of three years. A fine was just as it sounds. Most cases were settled.
The system somewhat resembles the Becker-Stigler idea in the sense that the perpetrator of the crime effectively pays a fine of some type directly to the victim. Furthermore, since the prosecution was left to the victim, it follows that the victim owns the property rights to the damages created by the criminal. This characteristic is important. Prosecuting a criminal is costly. A poor victim might not have the resources to prosecute the case. However, since the victim holds the property right to prosecution, he could sell the right to someone else. This transfers the risk of prosecution to someone else while providing compensation to the poor victim. The more a prosecutor expects to earn from taking the case, the more he would be willing to pay the victim for the rights. Although it is also possible that some prosecutors would want to take the case without pay in order to have a chance at developing a reputation as a successful prosecutor.
Ultimately, Friedman attributes the decline of this system to the rise in the concentration of wealth and power in the society.
Given the limited nature of what we know about the Icelandic example and conflicting information in different historical documents, it is not clear to what extent the Icelandic example really represents a test of Becker and Stigler’s idea for a private system of criminal law. Nonetheless, the point of this post is the thought experiment itself.
The objective of any good social scientist is to try to understand why the world is the way that it is. Price theory provides one set of tools through which to view the world. As such, it is capable of providing a unique perspective to stimulate conversation and debate about how one can explain the existence of things that many take for granted in the current, modern form. Price theory often creates little strings that when pulled upon can inspire new perspectives on topics or even provide direct answers to why the world is the way that it is. In the newsletter, I think we often focus on the latter, but the former is often quite important. Price theory can serve as a framing device for thinking through particular issues in ways that ultimately result in new insights and understanding.
Becker and Stigler’s work sparked a great deal of debate in the law and economics literature about why criminal law is constructed in the way that it is precisely because they brought unique price theoretic arguments to the topic. It also inspired people like David Friedman to not only develop theories about why criminal law is different from torts, but also to study legal systems different from ours. Sometimes the contribution of price theory is to start a discussion that narrows in on particular insights and greater understanding.