Summary
Abstract
Despite an abundance of empirical evidence on crime spanning over 40 years, there exists no consensus on the impact of the criminal justice system on crime activity. We construct a new panel data set that contains all relevant variables prescribed by economic theory. Our identification strategy allows for a feedback relationship between crime and deterrence variables, and it controls for omitted variables and measurement error. We deviate from the majority of the literature in that we specify a dynamic model, which captures the essential feature of habit formation and persistence in aggregate behaviour. Our results show that the criminal justice system exerts a large influence on crime activity. Increasing the risk of apprehension and conviction is more influential in reducing crime than raising the expected severity of punishment.