Photo: Peter Thal Larsen
This week, Free exchange takes a look at whether corporate crime makes economic sense. (The full article, from the print edition, is here.) Banks, drug companies and weapons makers have all been stung with record fines recently.
But while fines keep going up, corporate rule breaking for example, the LIBOR banksters seems to be booming.
Why aren’t high fines deterring bad behaviour?
One reason could be that the fines, which can be seen as the price of crime, are too low.
The economics of crime would support this idea. Many crime economists use a framework set out by Gary Becker of the University of Chicago. (Mr Becker’s blog is here.)
The idea is that would-be criminals rationally weigh up the expected costs and benefits of breaking the rules. If the probability of being caught or the level of fine is too low, then the expected costs might be outweighed by the benefits.
In this case, crime does pay and crime can be rational. The same logic applies to much more minor rules, which is why Mr Becker sometime chooses not to buy a parking ticket, as he explains in a 2006 interview with Tim Harford.
The notion of rational crime can be used to assess whether fines are set at sensible levels. One rule of thumb antitrust economists use is that cartels can achieve overcharges of 20-30%.
But the agencies that police cartels use fines of between 10-40% (Britain’s watchdog is at the weak end of the scale, Americas is more beefy).
Mr Beckers crime calculus shows the problem with this: with a 50% detection rate, and fines ranging between 10-40%, the expected cost of cartel crime is in the 5-20% range.
Use a 10% detection rate, and expected punishment costs fall to 1-4%. So the expected benefits outweigh the costs. At the moment, it seems, some corporate crimes pay handsomely.