Paul R. Zimmerman

Handbook on the Economics of Crime

Contents: Preface: Background and Overview Bruce L. Benson and Paul R. Zimmerman PART I: THEORETICAL AND EMPIRICAL DEVELOPMENTS: BECKER, EHRLICH AND BEYOND 1. The Market Model of Crime: A Short Review and New Directions Isaac Ehrlich 2. Estimating the Supply of Crime: Recent Advances Helen Tauchen 3. The Measure of Vice and Sin: A Review of the Uses, Limitations and Implications of Crime Data Alexander Tabarrok, Paul Heaton and Eric Helland 4. Dynamic Perspectives on Crime Justin McCrary PART II: ECONOMIC ANALYSIS OF THE PUBLIC PRODUCTION OF CRIMINAL JUSTICE 5. The Historical Development of Public Policing, Prosecution and Punishment Nicholas A. Curott and Edward Peter Stringham 6. Police, Prisons, and Punishment: The Empirical Evidence on Crime Deterrence Jonathan Klick and Alexander Tabarrok 7. Prison Population and Crime Thomas B. Marvell 8. The Allocation of Police Bruce L. Benson 9. The Economic Analysis of Corruption Fred S. McChesney 10. Economics of Crime and Drugs: Prohibition and Public Policies for Illicit Drug Control Edward M. Shepard, and Paul R. Blackely PART III: CRIME AND THE ECONOMY 11. The Economic Costs of Criminal Activity: A Discussion of Methodological Approaches and Empirical Estimates Allen K. Lynch 12. Crime and Housing Prices Keith Ihlanfeldt and Thomas Mayock 13. Corruption, Crime and Economic Growth Benjamin Powell, G.P. Manish and Malavika Nair 14. Labor Markets and Crime: New Evidence on an Old Puzzle David B. Mustard 15. Private Policing: Experiences, Evaluation and Future Direction Erwin A. Blackstone and Simon Hakim PART IV: CONTROVERSIES AND DEBATES IN THE ECONOMICS-OF-CRIME LITERATURE 16. The Economics of Capital Punishment and Deterrence Paul R. Zimmerman 17. Firearms and Homicide Carlisle E. Moody 18. Abortion and Crime: A Review Ted Joyce 19. Casinos and Crime in the USA Douglas M. Walker 20. Conclusion Bruce L. Benson and Paul R. Zimmerman Index

Vertical Relationships and Competition in Retail Gasoline Markets: Comment

In a paper in the March 2004 AER, Justine Hastings concludes that the acquisition of an independent gasoline retailer, Thrifty, by a vertically integrated firm, ARCO, is associated with sizable price increases at competing stations. To better understand the novel mechanism to which she attributes this effect - which combines vertical integration and rebranding - we attempted but ultimately failed to reproduce the results using alternative data. In addition, we show that the welfare effects of the transaction are ambiguous in the theoretical model which she posits as underlying the empirical results.

The competitive impact of hypermarket retailers on gasoline prices

Hypermarkets are large retail suppliers of general merchandise or grocery items that also sell gasoline, often at very low margins. This paper estimates the impact of hypermarkets on average state-level retail gasoline prices and margins. The empirical results indicate an economically and statistically significant price-decreasing effect of increased hypermarket competition. The estimations also suggest that refiners lower the delivered wholesale prices charged to their affiliated lessee-dealer and open-dealer stations in response to increased hypermarket competition, which in turn translates to lower retail (street) prices. The adoption of sales-below-cost laws may lessen the price-reducing effects from hypermarket competition.

Implicit Taxes Collected by State Liquor Monopolies

State monopolization or taxation aresupposedly justified because of negativeexternalities from alcohol consumption, butrecent research questions the efficacy ofsuch policies, suggesting that their actualgoals may be revenue-generation.Consideration of this hypothesis isfacilitated by estimates of the implicittaxes charged in monopoly states, whichgenerally are substantially higher thantaxes in non-monopoly states. Evidencethat monopolization and high taxes do notaffect the level of externalities is alsoexplained by adjustments that rationalindividuals make to avoid the consequencesof such policies, thus providing furthersupport for the revenue-maximizationhypothesis.

Edgeworth Price Cycles in Gasoline: Evidence from the U.S.

Studies of gasoline prices in multiple countries have found a repeated sequence of asymmetric cycles where a sharp price increase is followed by gradual decreases. This price pattern is linked to Maskin & Tirole’s (1988) theoretical duopoly pricing game that produces a similar pattern, Edgeworth price cycles. We examine data on average daily city-level retail gasoline and diesel prices for 355 cities in the U.S. from 2001-2007 using multiple methods to identify price cycles. We show that a relatively small number of U.S. cities concentrated in a number of contiguous upper Midwestern states evidence Edgeworth cycle-like pricing behavior. Within our data set cities tend to either cycle in all years or they do not cycle at all. We examine prices in cycling and non-cycling cites controlling for other factors and find consumers are no worse off, and likely better off, on average, in cycling than non-cycling cities. Finally, unlike previous studies, we find that some vertically integrated (branded) retail gasoline stations are themselves potentially important drivers of the scale and scope of cycling in retail gasoline prices. REVISED: May 2011

Does Allowing the Bells to Offer InterLATA Long-Distance Service Affect Entry into Local Telephony?

Following the 1984 divestiture of AT&T, local telephone service was provided by several Regional Bell Operating Companies (RBOCs). The RBOCs served as monopoly providers of local telephone service in their respective territories but were prohibited from offering long-distance service to their in-region subscribers. Section 271 of the landmark Telecommunications Act of 1996 allows an RBOC to offer in-region long-distance service if it demonstrates that the local telephone exchange market is open to competitive entry. This study empirically evaluates the efficacy of this policy by considering the impact of RBOC entry into long-distance on the development of competitive entry into local telephony. The results suggest that section 271 has been successful in promoting entry into local telephony. However, aggregate price data suggest that this entry has not been realized with lower rates for residential telephone subscribers.

A Theoretical Analysis of Alcohol Regulation and Drinking-Related Economic Crime

Alcohol consumption is widely believed to influence criminal activity, and numerous sociological, criminological, and psychological studies demonstrate an apparent positive correlation between drinking and crime. Using a multiattribute model of offender and victim behavior, this study examines the theoretical effects of changes in the price of alcohol on the incidence of crimes committed for economic gain. It is shown that in the general case price effects do not result in an unambiguous decrease in the rates of crime or victimization even when the models are constructed to impose a bias towards the finding of a causal negative price effect. Using a modified model of the drinking offender that imposes even further structure on the model, it is shown that the realization and magnitude of a negative equilibrium alcohol price effect will likely depend upon the implementation of complementary alcohol control policies. The implications of the theoretical analysis to policy implementation and empirical research are also considered.

The Sraffa-Hayek Debate on the Natural Rate of Interest

Hayeks Prices and Production, based on his hugely successful lectures at LSE in 1931, was the first English presentation of Austrian business-cycle theory, and established Hayek as a leading business-cycle theorist. Sraffas 1932 review of Prices and Production seems to have been instrumental in turning opinion against Hayek and the Austrian theory. A key element of Sraffas attack was that Hayek’s idea of a natural rate of interest, reflecting underlying real relationships, undisturbed by monetary factors, was, even from Hayeks own perspective, incoherent, because, without money, there is a multiplicity of own rates, none of which can be uniquely identified as the natural rate of interest. Although Hayeks response failed to counter Sraffa’s argument, Ludwig Lachmann later observed that Keyness treatment of own rates in Chapter 17 of the General Theory (itself a generalization of Fisher’s (1896) distinction between the real and nominal rates of interest) undercut Sraffas criticism. Own rates, Keynes showed, cannot deviate from each other by more than expected price appreciation plus the cost of storage and the commodity service flow, so that anticipated asset yields are equalized in intertemporal equilibrium. Thus, on Keyness analysis in the General Theory, the natural rate of interest is indeed well-defined. However, Keynes’s revision of Sraffa’s own-rate analysis provides only a partial rehabilitation of Hayeks natural rate. There being no unique price level or rate of inflation in a barter system, no unique money natural rate of interest can be specified. Hayek implicitly was reasoning in terms of a constant nominal value of GDP, but barter relationships cannot identify any path for nominal GDP, let alone a constant one, as uniquely compatible with intertemporal equilibrium.

Market power and the deregulation of special access service by the Federal Communications Commission1

In 1999, the Federal Communications Commission adopted an order granting complete deregulation of the rates for special access service for specific metropolitan statistical areas based on an objective showing that there was potential competition in that market. This was done in an environment where the local exchange carriers (LECs) subject to price caps were earning a rate of return in excess of 22% with the rate of return on an upward trend. By 2002, the average rate of return across all price cap LECs topped 35%. The questions investigated in this article are whether the price cap LECs have market power in supplying special access service and whether they have taken advantage of this. The data clearly show that this is the case. Given the prevailing situation, there is a clear need to revisit the pricing flexibility order. First, the product market for special access service needs to be more carefully examined and, second, the metrics used to define the potential for competition need to be revamped.

Special access service and its regulation in the United States

In 1999 the Federal Communications Commission adopted an order granting complete deregulation of the rates for special access service for specific metropolitan statistical areas based on an objective showing that there was potential competition in that market. This was done in an environment where the local exchange carriers (LECs) subject to price caps were earning a rate of return in excess of 22 percent, with the rate of return on an upward trend. By 2002, the average rate of return across all price cap LECs topped 35 percent. The question that is investigated in this paper is whether the price cap LECs have market power in supplying special access service and whether they have taken advantage of this. The data clearly show that this is the case. Given the prevailing situation, there is a clear need to revisit the pricing flexibility order. First, the product market for special access service needs to be more carefully examined. Second, the metrics used to define the potential for competition need to be revamped.