The economics of crime

While many economists spend their time analysing the economic activities of legitimate businesses and consumers, Dr Rocco d’Este is more interested in the illegitimate and the illegal.

“Criminals are subject to market forces just like regular businesses,” says Dr d’Este, who is Lecturer in Economics at the University of Sussex Business School. “Supply, demand, and access to markets are all key factors in criminal operations and have an impact on the profitability of criminal activity.”

Dr d’Este’s research is not designed for criminals looking to balance their books or boost profits, however. Instead, his research provides insights to lawmakers seeking to disrupt criminal operations.

“Understanding the economic impacts of certain interventions by the authorities, and how criminals respond to them, are vital in order to design laws that are effective in deterring crime.”

Thefts, Pawnshops and Stolen Goods

Dr d’Este’s recent research into the availability of markets for stolen property is a good example of this.

Thieves who steal personal property need a market to convert their acquisitions into cash. Pawnshops provide one such market, offering quick cash payments for personal items such as jewellery, mobile phones, and laptops.

Pawnshops have long been associated with criminal activity, but there has been little empirical research into the relationship between these markets and the rate of theft crimes in a given area.

“Since pawnshops are such an attractive market for thieves, we might expect that a prevalence of pawnshops in a particular region would incentivise crime and lead to an increased rate of thefts,” argues Dr d’Este.

“More pawnshops could increase a thief’s likelihood of finding an unaware or complicit pawnbroker who will take stolen property off their hands. The increased competition between multiple pawnbrokers might increase the profits thieves can get for their stolen wares. Finally, more pawnshops also make police surveillance more difficult, which reduces the likelihood of being caught.”

To test his hypothesis, Dr d’Este merged county-level annual crime data from the FBI with county-level annual pawnshops data in the USA and traced the relationship between the two. The results confirmed his suspicion; the opening of one pawnshop in a county led to an increase of around 13 acquisitive crimes in the same county.

These increases were concentrated on crimes that yielded goods that were tradeable with pawnbrokers. Vehicle thefts, for example, were unaffected, since cars and trucks are not generally accepted by pawnshops.

The effect of pawnshops on thefts was even greater following an increase in global gold prices. Gold is highly sought after by pawnbrokers, who melt it down and sell it on to the bullion market. Dr d’Este found that an increase in gold prices caused more burglaries in areas with more pawnshops than other areas.

“Gold prices increase the criminogenic effects of pawnshops on burglaries by around 30%, which further cements the causal relationship between pawnshops and theft crimes,” concludes d’Este.

Given the major cost that theft crimes impose to society (in 2010, the USA experienced one theft every forty seconds at a total cost of $16 billion to the victims) Dr d’Este’s research indicates that the activities of pawnshops and other markets for stolen goods should be subject to closer monitoring.

“Junkyards, flea markets, eBay, Craigslist – all of these are possible markets for stolen goods,” says d’Este, “policymakers, law enforcement officers and researchers should pay more attention to them and the role they might play in incentivising crime.”

Supply Side Interventions: The case of crystal meth

Dr d’Este has also examined the impact of government responses to the crystal methamphetamine (meth) economy.

The US government has sought to disrupt the market for crystal meth by implementing supply-side interventions that restrict access to key inputs in the manufacture of the drug.

For example, pseudoephedrine-based medications, which are widely sold as a treatment for flu symptoms, can also be used to synthesise meth in small-scale domestic laboratories. Between 2004 and 2006, the US government introduced strict over-the-counter (OTC) laws to restrict access to the medication, such as regulating the placement of the product in shops to reduce the likelihood of theft, and requiring that retailers maintain a logbook of clients to prevent repeat purchases.

A study published in the Journal of Public Economics in 2014 found that the introduction of these regulations had reduced the number of operating meth labs in those areas by around 36%, but that there was no change in possession or sale of drugs, suggesting that users found supplies of meth elsewhere.

What the study did not investigate, however, was the impact of the laws on property and violent crimes.

“New laws intended to deter one form of crime (i.e. drug production) can have unintended effects on other illegal activities, as criminals respond and adapt to the new circumstances,” says d’Este, “Understanding the unintended consequences of new regulations is vital in order to measure the success of anti-crime measures, and improve future policy.”

To analyse the effect of the OTC laws on other crimes, Dr d’Este collected monthly FBI crime data between 2002 and 2006 and measured the crime rate relative to the introduction of an OTC regulation in a given county or state.

Dr d’Este found that the OTC reforms led to a 3.2% increase in larcenies, a 3% increase in burglaries and a 2.8% increase in aggravated assaults, lasting up to seven months after the implementation of the regulations. This equated to an average economic cost of $3.9 million in those states.

The spike in crimes can be plausibly attributed to increased violence between unaffected criminal groups fighting to take control of the vacated drug markets, and thefts carried out by drug users looking to maintain their usage in the absence of the cheap meth previously produced domestically

These results provide important lessons for policymakers.

“My findings suggest that policy interventions that restrict access to methamphetamine’s chemical precursors, while having no impact on demand, could lead to an increase in criminal activity,” says d’Este.

“Policymakers should consider implementing any supply-side interventions in conjunction with other crime-prevention strategies, harm-reduction programmes, and social programmes that can tackle the demand for drugs.”