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Party A steals something of value to Party B and demands a ransom for its return. But once the ransom has been paid, what is to stop Party A from coming back and demanding more?

One mechanism that purchases commitment is reputation. Party A has more ransoms to extract in the future and seeks to be seen as a fair player despite being an extortionist. An interesting example is provided by Cryptowall. This “company” sends an email with a devious attachment, a virus that encrypts your harddrive if you click on it. They demand a ransom in Bitcoin to send the decryption key. The price changes over time.

The fact that they do not take your data means that they cannot come back and demand another ransom for the same data if you pay.

Because the price changes, there can be errors – you pay a ransom of 500 and by that time the price has gone up to 550 and you do not get the decryption key. What to do? A good credit card company would waive a late fee to keep a good reputation and so does Cryptowall. From the New York Times:

Use the CryptoWall message interface to tell the criminals exactly what happened. Be honest, in other words.

So she did. She explained that the virus had struck the same week that a major snowstorm hit Massachusetts and the Thanksgiving holiday shut down the banks. She told them about the unexpected Bitcoin shortfall and about dispatching her daughter to the Coin Cafe A.T.M. at the 11th hour. She swore she had really, really tried not to miss their deadline. And then a weird thing happened: Her decryption key arrived.

(HT: Alex Wearn)


Any punishment designed for deterrence is based on the following calculation.  The potential criminal weighs the benefit of the crime against the cost, where the cost is equal to the probability of being caught multiplied by the punishment if caught.

Taking surveillance technology as given, the punishment is set in order to calibrate the right-hand-side of that comparison.  Optimally, the expected punishment equals the marginal social cost of the crime so that crimes whose marginal social cost outweighs the marginal benefit are deterred.

When technology allows improved surveillance, the law does not adjust automatically to keep the right-hand side constant.  Indeed there is a ratchet effect in criminal law:  penalties never go down.

So we naturally hate increased surveillance, even those of us who would welcome it in a first-best world where punishments adjust along with technology.

Why are conditional probabilities so rarely used in court, and sometimes even prohibited?  Here’s one more good reason:  prosecution bias.

Suppose that a piece of evidence X is correlated with guilt.  The prosecutor might say, “Conditional on evidence X, the likelihood ratio for guilt versus innoncence is Y, update your priors accordingly.”  Even if the prosecutor is correct in his statistics his claim is dubious.

Because the prosecutor sees the evidence for all suspects before deciding which ones to bring to trial.  And the jurors know this.  So the fact that evidence like X exists against this defendant is already partially reflected in the fact that it was this guy they brought charges against and not someone else.

If jurors were truly Bayesian (a necessary presumption if we are to consider using probabiilties in court at all) then they would already have accounted for this and updated their priors accordingly before even learning that evidence X exists.  When they are actually told it would necessarily move their priors less than what the statistics imply, perhaps hardly at all, maybe even in the opposite direction.

Amnesty –forgiving all of the current and previous violators but renewing a threat to punish future violators– always seems like a reputation fail.  If we are granting amnesty today then doesn’t that signal that we will eventually be granting amnesty again in the future?

But there is at least one environment in which a once-only amnesty is incentive compatible and effective:  when crime has bandwagon effects.  For example, suppose there’s a stash of candy in the pantry and my kids have taken to raiding it.  I catch one red-handed but I can’t punish her because she rightly points out that since everybody’s doing it she assumed we were looking the other way.  A culture of candy crime had taken hold.

An amnesty (bring me your private stash and you will be forgiven) moves us from the everyone’s a criminal because everyone’s a criminal equilibrium to the one in which nobody’s a criminal.  The latter is potentially stable if its easier to single out and punish a lone offender than one of many.

Luigi Zingales writes that business schools are teaching MBA students to be criminals.

Oddly, most economists see their subject as divorced from morality. They liken themselves to physicists, who teach how atoms do behave, not how they should behave. But physicists do not teach to atoms, and atoms do not have free will. If they did, physicists would and should be concerned about how the atoms being instructed could change their behavior and affect the universe. Experimental evidence suggests that the teaching of economics does have an effect on students’ behavior: It makes them more selfish and less concerned about the common good. This is not intentional. Most teachers are not aware of what they are doing.

My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity. The student’s experience is consistent with the experimental findings I mentioned above.

On E-book collusion:

Once Apple made it known it would accept agency pricing (but not selling books at a higher price than other retail competitors), the publishing companies didn’t have to act in concert, although one of them had to be willing to bell the very large cat called Amazon by moving to the agency model.

I’ve long had a personal hypothesis — not based on any inside information, but simply my own read on the matter, I should be clear — that the reason it was Macmillan that challenged Amazon on agency pricing was that Macmillan is a privately held company, and thus immune from being punished short-term in the stock market for the action. Once it got Amazon to accept agency pricing, the other publishers logically switched over as well. This doesn’t need active collusion; it does need people paying attention to how the business dominoes could potentially fall.

Again, maybe they all did actively collude, in which case, whoops, guys. Stop being idiots. But if they did not, I suppose the question is: At what point does everyone knowing everyone else’s business, having a good idea how everyone else will act, and then acting on that knowledge, begin to look like collusion (or to the Justice Department’s point, activelybecome collusion)? My answer: Hell if I know, I’m not a lawyer. I do know most of these publishers have a lot of lawyers, however (as does Apple), and I would imagine they have some opinions on this.

John Scalzi is an author, blogger, and apparently a pretty good economist too.  Read the whole thing.

Imagine you discover a lost manuscript. You read it and it has a profound effect on you. You want as many people as possible to discover it and be affected as you were.

Publishers tell you that there is no market for re-discovered literature. But a big publisher is required for the book to have the scale of distribution it deserves.

After a while you see the solution. This is a lost manuscript and nobody would know if you were to put your own name on it, market it as something brand new and get all the buzz that would come from the reviews and best seller lists.

Would you do it? Would you condemn someone who did?

“Corporations are evil” and we know this because they are always doing malicious things that are only later exposed. This often involves exploiting the complexity of transactions and the inability or unwillingness of consumers to wade through the thicket by surreptitiously ripping people off.  For example, unauthorized charges inserted into phone bills, in a practice known as “cramming”, cost Americans $2 billion dollars a year, according to this article.

When something like this is discovered, the automatic reaction is to assume that the malice was intentional. They were sticking those charges in there to squeeze money out of consumers. And its basic economics that if they can secretly insert charges and make money they will. On the other hand, such a theory would appear to require you to accept they hypothesis that “corporations are evil” or at least they are cold-hearted profit maximizers.

But you can believe that corporations are not intentionally malicious and still assume that whenever there is a cold-hearted way to steal money they will do it.    Because many malicious practices are not actively designed, rather they creep in and they are passively allowed to persist.

For example, those charges could have been legitimate under an outdated policy and when the policy was changed they forgot to remove them. Or some bumbling technician could have accidentally inserted them. Modern transactions are so complicated that random “mutations” are going to appear without any malicious intent and indeed without anyone noticing. This is a far more likely explanation than someone purposefully sticking them in there, especially if you doubt that “corporations are evil.”

Indeed, to have a conscious policy of ripping off unsuspecting customers requires instructing somebody to do that, and leaving a paper trail. Even a truly evil corporation understands that this is the wrong way to do it. The right way to do it is to structure the organization in a way that facilitates malice creep.

You don’t have to instruct anybody to allow mutant ripoffs to appear. They appear on their own, no paper trail required. All you need to do is to give weak incentives to the officers you have charged with making sure that you are not ripping anybody off.  Nobody in your organization will have any knowledge of all the ways you are cheating your clients, not even you. By design.

There is an art to the design of an organization that cultivates malice creep. Because at the same time you have to stop “virtue creep” in its tracks. You don’t want unintended credits to randomly get inserted into the phone bill. What you need is a one-sided monitoring program. You wait around for lots of mutations to appear, you know that some are virtuous and some are malicious. Now getting rid of the virtuous ones and keep the malicious ones is easily done, just announce that its time to do some “cost-cutting.” Form an ad hoc task force to go through and find ways to restructure billing in ways that save the company money. They’ll just look at the credits and ignore the charges.

In terms of the long-run bottom line, Darwinism and Lamarckism are almost indistinguishable, but Occam’s razor favors Darwin.  I would argue by the same principles that most of the malicious practices of organizations emerge by cultivated accident rather than by design.


via Arthur Robson:

While appeals often unmask shaky evidence, this was different. This time, a mathematical formula was thrown out of court. The footwear expert made what the judge believed were poor calculations about the likelihood of the match, compounded by a bad explanation of how he reached his opinion. The conviction was quashed.

And the judge ruled that Bayes’ law for conditional probabilities could not be used in court.  Statisticians, Mathematicians, and prosecutors are worried that justice will suffer as a result.  The statistical evidence centered around the likelihood of a coincidental match of shoeprint with shoes owned by the Defendant.

In the shoeprint murder case, for example, it meant figuring out the chance that the print at the crime scene came from the same pair of Nike trainers as those found at the suspect’s house, given how common those kinds of shoes are, the size of the shoe, how the sole had been worn down and any damage to it. Between 1996 and 2006, for example, Nike distributed 786,000 pairs of trainers. This might suggest a match doesn’t mean very much. But if you take into account that there are 1,200 different sole patterns of Nike trainers and around 42 million pairs of sports shoes sold every year, a matching pair becomes more significant.

Now if I can prove to jurors that there was one shoe in the basement and another shoe upstairs, then probably I can legitimately claim to have proven that the total number of shoes is two because the laws of arithmetic should be binding on the jurors deductions.  And if there is a chance that a juror comes to some different conclusion then it would make sense for an expert witness, or the judge even, tell the juror that he is making a mistake.  Indeed a courtroom demonstration could prove the juror wrong.

But do the “laws” of probability have the same status?  If I can prove to the juror that his prior should attach probability p to A and probability q to [A and B], and if the evidence proves that A is true,  should he then be required to attach probability q/p to B?  Suppose for example that a juror disagreed with this conclusion. Could he be proven wrong?  A courtroom demonstration could show something about relative frequencies, but the juror could dispute that these have anything to do with probabilities.

It appears though that the judge’s ruling in this case was not on the basis of bayesian/frequentist philosophy, but rather about the validity of a Bayesian prescription when the prior itself is subjective.

The judge complained that he couldn’t say exactly how many of one particular type of Nike trainer there are in the country. National sales figures for sports shoes are just rough estimates.

And so he decided that Bayes’ theorem shouldn’t again be used unless the underlying statistics are “firm”. The decision could affect drug traces and fibre-matching from clothes, as well as footwear evidence, although not DNA.

This is a reasonable judgment even if the court upholds Bayesian logic per se.  Because the prior probability of a second pair of matching shoes can be deduced from the sales figures only under some assumptions about the distribution of shoes with various tread patterns.  The expert witnesses probably assumed that the accused and a hypothetical third-party murderer were randomly assigned tread patterns on their Nikes and that these assignments were independent.  But if the two live in the same town and shop at the same shoe store and if that store sold shoes with the same tread pattern, then that assumption would significantly understate the probability of a match.

The opening gambit of the book is surprisingly simple: If you were sentenced to five years in prison but had the option of receiving lashes instead, what would you choose? You would probably pick flogging. Wouldn’t we all?

I propose we give convicts the choice of the lash at the rate of two lashes per year of incarceration. One cannot reasonably argue that merely offering this choice is somehow cruel, especially when the status quo of incarceration remains an option. Prison means losing a part of your life and everything you care for. Compared with this, flogging is just a few very painful strokes on the backside. And it’s over in a few minutes. Often, and often very quickly, those who said flogging is too cruel to even consider suddenly say that flogging isn’t cruel enough. Personally, I believe that literally ripping skin from the human body is cruel. Even Singapore limits the lash to 24 strokes out of concern for the criminal’s survival. Now, flogging may be too harsh, or it may be too soft, but it really can’t be both.

The article is an excellent example of how considering an alternative (flogging replacing prison) which despite being non-serious still makes you think about the status quo in a new way.

If we could calibrate the number of lashes so as to create an equal disincentive but at a tiny fraction of the cost that should be a Pareto improvement right? Somehow that doesn’t seem right.  I think the thought experiment reveals that one important part of incarceration is just to prevent the criminal from committing more crimes.

If N lashes is just as unpleasant as 1 year in prison what exactly does that mean? It says that N lashes plus whatever I decide to do during the next year is just as unpleasant as being shut in for a year.  It will quite often be that the pivotal comparison is between prison and N lashes plus another year worth of crime.  In that case we certainly don’t have a Pareto improvement.

(hoodhi:  The Browser.)

A former academic economist and game theorist is now the Chief Economic Advisor in the Ministry of Finance in India.  His name is Kaushik Basu. Via MR, here is a policy paper he has just written advising that the giving of bribes should be de-criminalized.

The paper puts forward a small but novel idea of how we can cut down the incidence of bribery. There are different kinds of bribes and what this paper is concerned with are bribes that people often have to give to get what they are legally entitled to. I shall call these ―harassment bribes.‖ Suppose an income tax refund is held back from a taxpayer till he pays some cash to the officer. Suppose government allots subsidized land to a person but when the person goes to get her paperwork done and receive documents for this land, she is asked to pay a hefty bribe. These are all illustrations of harassment bribes. Harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society. The central message of this paper is that we should declare the act of giving a bribe in all such cases as legitimate activity. In other words the giver of a harassment bribe should have full immunity from any punitive action by the state.

This is not just crazy talk, there is some logic behind it fleshed out in the paper. If giving a bribe is forgiven but demanding a bribe remains a crime, then citizens forced to pay bribes for routine government services will have an incentive to report the bribe to the authorities.  This will discourage harrassment bribery.

The obvious question is whether the bribe-enforcement authority will itself demand bribes.  To whom does a citizen report having given a bribe to the bribe authority? At some point there is a highest bribe authority and it can demand bribes with impunity.  With that power they can extract all of the reporter’s gains by demanding it as a bribe.

Worse still they can demand an additional bribe from the original harasser in return for exonerating her. The effect is that the harasser sees only a fraction of the return on her bribe demands. This induces her to ask for even higher bribes.  Higher bribes means fewer citizens are able to pay them and fewer citizens receive their due government services.

The bottom line is that in an economy run on bribes you want to make the bribes as efficient as possible.  That may mean encouraging them rather than discouraging them.

I wrote last week about More Guns, Less Crime.  That was the theory, let’s talk about the rhetoric.

Public debates have the tendency to focus on a single dimension of an issue with both sides putting all their weight behind arguments on that single front.  In the utilitarian debate about the right to carry concealed weapons, the focus is on More Guns, Less Crime. As I tried to argue before, I expect that this will be a lost cause for gun control advocates.  There just isn’t much theoretical reason why liberalized gun carry laws should increase crime.  And when this debate is settled, it will be a victory for gun advocates and it will lead to a discrete drop in momentum for gun control (that may have already happened.)

And that will be true despite the fact that the real underlying issue is not whether you can reduce crime (after all there are plenty of ways to do that,) but at what cost.  And once the main front is lost, it will be too late for fresh arguments about externalities to have much force in public opinion.  Indeed, for gun advocates the debate could not be more fortuitously framed if the agenda were set by a skilled debater.  A skilled debater knows the rhetorical value of getting your opponent to mount a defense and thereby implicitly cede the importance of a point, and then overwhelming his argument on that point.

Why do debates on inherently multi-dimensional issues tend to align themselves so neatly on one axis?  And given that they do, why does the side that’s going to lose on those grounds play along?  I have a theory.

Debate is not about convincing your opponent but about mobilizing the spectators.  And convincing the spectators is neither necessary nor sufficient for gaining momentum in public opinion.  To convince is to bring others to your side.  To mobilize is to give your supporters reason to keep putting energy into the debate.

The incentive to be active in the debate is multiplied when the action of your supporters is coordinated and when the coordination among opposition is disrupted.  Coordinated action is fueled not by knowledge that you are winning the debate but by common knowledge that you are winning the debate.  If gun control advocates watch the news after the latest mass killing and see that nobody is seriously representing their views, they will infer they are in the minority and give up the fight even if in fact they are in the majority.

Common knowledge is produced when a publicly observable bright line is passed.  Once that single dimension takes hold in the public debate it becomes the bright line:  When the dust is settled it will be common knowledge who won. A second round is highly unlikely because the winning side will be galvanized and the losing side demoralized.  Sure there will be many people, maybe even most, who know that this particular issue is of secondary importance but that will not be common knowledge.  So the only thing to do is to mount your best offense on that single dimension and hope for a miracle or at least to confuse the issue.

(Real research idea for the vapor mill.  Conjecture:  When x and y are random variables it is “easier” to generate common knowledge that x>0 than to generate common knowledge that x>y.)

Chickle:  Which One Are You Talking About? from

The Texas legislature is on the verge of passing a law permitting concealed weapons on University campuses, including the University of Texas where just this Fall my co-author Marcin Peski was holed up in his office waiting out a student who was roaming campus with an assault rifle.

This post won’t come to any conclusions, but I will try to lay out the arguments as I see them.  More guns, less crime requires two assumptions.  First, people will carry guns to protect themselves and second, gun-related crime will be reduced as a result.

There are two reasons that crime will be reduced: crime pays off less often, and sometimes it leads to shooting. In a perfect world, a gun-toting victim of a crime simply brandishes his gun and the criminal walks away or is apprehended and nobody gets hurt.  In that perfect world the decision to carry a gun is simple.  If there is any crime at all you should carry a gun becuase there are no costs and only benefits.  And then the decision of criminals is simple too:  crime doesn’t pay because everyone is carrying a gun.

(In equilibrium we will have a tiny bit of crime, just enough to make sure everyone still has an incentive to carry their guns.)

But the world is not perfect like that and when a gun-carrying criminal picks on a gun-carrying victim, there is a chance that either of them will be shot.  This changes the incentives.  Now your decision to carry a gun is a trade-off between the chance of being shot versus the cost of being the victim of a crime.  The people who will now choose to carry guns are those for whom the cost of being the victim of a crime outweigh the cost of an increased chance of getting shot.

If there are such people then there will be more guns.  These additional guns will reduce crime because criminals don’t want to be shot either.  In equilibrium there will be a marginal concealed-weapon carrier.  He’s the guy who, given the level of crime, is just indifferent between being a victim of crime and having a chance of being shot.  Everyone who is more willing to escape crime and/or more willing to face the risk of being shot will carry a gun.  Everyone else will not.

In this equilibrium there are more guns and less crime.  On the other hand there is no theoretical reason that this is a better outcome than no guns, more crime.  Because this market has externalities:  there will be more gun violence.  Indeed the key endogenous variable is the probability of a shootout if you carry a gun and/or commit a crime.  It must be high enough to deter crime.

And there may not be much effect on crime at all.  Whose elasticity with respect to increased probability of being shot is larger, the victim or the criminal?  Often the criminal has less to lose.  To deter crime the probability of a shooting may have to increase by more than victims are willing to accept and they may choose not to carry guns.

There is also a free-rider problem.  I would rather have you carry the gun than me.  So deterrence is underprovided.

Finally, you might say that things are different for crimes like mugging versus crimes like random shootings. But really the qualitative effects are the same and the only potential difference is in terms of magnitudes.  And it’s not obvious which way it goes.  Are random assailants more or less likely to be deterred?  As for the victims, on the one hand they have more to gain from carrying a gun when they are potentially faced with a campus shooter, but if they plan make use of their gun they also face a larger chance of getting shot.

NB:  nobody shot at the guy at UT in September and the only person he shot was himself.

I don’t mean breaking and entering.  It’s New Years Eve — 2PM on New Years Eve — and after heading out for a quick lunch I return to find The Jacobs Center locked for the weekend.  There is a separate electronic key to the building and I have one somewhere but I never need it so I don’t carry it around with me.  So I have to stand in the cold and wait for somebody to enter or exit the building and let me in.

There are two entrances so the question is which one to stand by and wait.  I wait for a while at the main entrance and then decide to try my luck at the next one on the other side of the building, about a 2 minute walk.  Of course on the way I am imagining that someone must be leaving from the first entrance just as it passed out of sight. When I get to the other entrance I find that there’s just as little activity there as at the first one. After a while I give up again and go back to the first.

I have a sinking feeling as I am walking back that I am violating some basic rationality postulate to have dropped the first alternative only to switch back to it again.  But it’s not hard to rationalize switching, even indefinite switching with a simple model of uncertain arrival rates.

At each entrance there is a random arrival process, say Poisson, which produces a comer or goer with some given flow rate.  It’s random so even if the arrivals are frequent on average its still possible that there is a long wait just because of bad luck.  Because it’s an unusual day I don’t know for sure what the arrival rates are at the two entrances so the best I can do is form a subjective distribution.

As time passes I learn only about the door I am watching and what I am learning is that the arrival rate is slower than I thought. Every moment that passes and I am still out in the cold the current door’s expected arrival rate is continuously dropping. There comes a point in time when it drops low enough that I want to switch to the other door.  The expected arrival rate at the other door hasn’t changed becuase I haven’t learned anything about it. I give up and walk to the other door once the estimated rate at the current door drops far enough below that it is worth 2 minutes of walking (and no chance of getting in during that time.) In fact, this may happen before the current door’s expected arrival rate drops below that of the other door. (Due to option value. See below.)

Once at the other door I start to learn about it and I stop learning about the first door.  Again, as time passes its estimated arrival rate drops while that of the first door remains constant.  There is again another threshold after which I return to the first.  Etc.  Until I finally give up and throw a brick through the Kellogg student lounge window.

Observation: Consider the threshold at which I switch from door 1 to door 2.  That is based on a comparison of the value of staying put versus the value of switching. The value of switching has built into it the option value of being able to switch back.  You can see the role of this option value by considering a truncated problem where once I switch doors I am unable to switch back.  Relative to that problem, the option of switching back makes me switch more frequently.  Because without the option to switch back, I want to hold on to the current option until I am certain that it’s a loser before giving it up for good.

Arbitraging profiling.

A white bank robber in Ohio recently used a “hyper-realistic” mask manufactured by a small Van Nuys company to disguise himself as a black man, prompting police there to mistakenly arrest an African American man for the crimes.

To use the justice system most effectively to stop leaks you have to make two decisions.

First, you have to decide what will be a basis for punishment. In the case of a leak you have essentially two signals you could use. You know that classified documents are circulating in public, and you know which parties are publishing the classified documents. The distinctive feature of the crime of leaking is that once the documents have been leaked you already know exactly who will be publishing them: The New York Times and Wikileaks. Regardless of who was the original leaker and how they pulled it off.

That is, the signal that these entities are publishing classified documents is no more informative about the details of the crime than the more basic fact that the documents have been leaked. It provides no additional incentive benefit to use a redundant signal as a basis for punishment.

Next you have to decide who to punish. Part of what matters here is how sensitive that signal is to given actor’s efforts. Now the willingness of Wikileaks and The New York Times to republish sensitive documents certainly provides a motive to leakers and makes leaks more likely. But what also matters is the incentive-bang for your punishment-buck and to deter all possible outlets from mirroring leaks would be extremely costly. (Notwithstanding Joe Lieberman.)

A far more effective strategy is to load incentives on the single agent whose efforts have the largest effect on whether or not a leak occurs: the guy who was supposed to keep them protected in the first place. Because when a leak occurs, in addition to telling you that some unknown and costly to track person spent too much effort trying to steal documents, it tells you that your agent in charge of keeping them secret didn’t spend enough effort doing the job you hired him to do.

You should reserve 100% of your scarce punishment resources where they will do the most good, incentivizing him (or her.)

(Based on a conversation with Sandeep.)

Update: The Australian Government seems to agree. (cossack click:  Sandeep)

Responding to the flap about the Pope’s new stance on condom use by male protsitutes, Rev. Joseph Fessio, editor in chief of Ignatius Press which published the book in which the Pope is quoted provides this clarification:

But let me give you a pretty simple example. Let’s suppose we’ve got a bunch of muggers who like to use steel pipes when they mug people. But some muggers say, gosh, you know, we don’t need to hurt them that badly to rob them. Let’s put foam pads on our pipes. Then we’ll just stun them for a while, rob them and go away. So if the pope then said, well, yes, I think that using padded pipes is actually a little step in a moral direction there, that doesn’t mean he’s justifying using padded pipes to mug people. He’s just saying, well, they did something terrible, but while they were doing that, they had a little flicker of conscience there that led them in the right direction. That may grow further, so they stop mugging people completely.

Side topic:  is the Catholic Church revealing that sin is a problem of moral hazard or adverse selection?

Yesterday on the NPR hourly newscast the lead-in to the barefoot bandit story was this “A man allegedly known as the barefoot bandit…”  Perhaps I had too much time on my hands (I had a doctor’s appointment and they always go like this:  Step 1) you are 30 minutes too early Step 2) please wait for an additional hour in a room with no AT&T reception Step 3) Stop wasting our time, your blood pressure is 120 over 70, go away and never come back) but this struck me as a strange way to phrase it.

Journalists apparently have a self-imposed rule that suspects should be “alleged” to have done whatever they are suspected of, at least until they are convicted.  Presumably this is to avoid prejudging guilt.  Now, since this guy was just picked up, the rule applies and he is “allegedly” something.  But allegedly what?  “Allegedly known as the barefoot bandit.”  Is it a crime to be known as the barefoot bandit?  And is that what he is accused of?

OK, there were some crimes committed and all of these crimes are thought to have been committed by the same person and that, so far unidentified, person has been given a proxy identity “the barefoot bandit.” Now we are trying to find the barefoot bandit.  The linguistic complication is that since “the barefoot bandit” is not a real identity you cannot say that someone “is” the barefoot bandit.  Whoever this criminal is, he is “AKA (*also* known as) the barefoot bandit.”  We are not literally looking for someone who is called the barefoot bandit, as if that by itself is a crime.  We are looking for the person who committed the crimes which have been grouped together by that heading.

So we are looking for the person who (not by his own choice has come to be) “known as the barefoot bandit.”  And now we have to somehow fit the “allegedly” in there in order to comply with the journalistic moral code.  That’s the problem and the NPR copyeditor seems to have just stuck them together without trying to parse the final product.

Probably he didn’t have the spare time afforded by a futile doctor’s appointment.  Or if he did, he had no iPhone reception to make the necessary changes before the newscast went live.

Here are some tips.

Computer Scoring – … Tax returns are “scored” using two systems – Discriminant Function System (DIF) and Unreported Income DIF (UIDIF). The Discriminant Information Function System (DIF) score gives the IRS an indication of the potential for change in tax due, based on past IRS experience. The Unreported Income DIF (UIDIF), as you can imagine, scores the return on the potential for unreported income. The higher the score, for either, the more likely the return will be reviewed.

Apparently these tips come from the IRS itself!  When would it make sense for the IRS to teach us how to avoid an audit?  It would make sense if the ways of cheating on your taxes were known and easy to describe.  Then the IRS just announces it will audit anyone who does something that looks like that.  But if there are always innovative ways to cheat on your taxes then an announcement like this, if truthful, probably only helps cheaters avoid audits.

On the other hand the IRS’s objective might be to maximize prosecutions. Then they want to lie about their audit policy and hope you believe them.

When I read this (via Ryan Sager) about the classic good cop/bad cop negotiating ploy:

BUT there was also a twist we did not address in our research, and in fact, would have been tough to do as we were studying people in “the wilds” of organizational life.  Their research shows that starting with a good cop and then using a bad cop was not effective, that the method only was effective for negotiating teams when the bad cop went first and the good cop followed.   So, this may mean it really should be called “The Bad Cop, Good Cop Technique.”

it brought to mind some famous studies of Daniel Kahneman on perception and the timing of pleasure and pain.  There is one you will never forget once you hear about it.  Proctologists randomly varied the way in which they administered a standard colonoscopy procedure.  Some patients received the usual treatment in which a camera was plunged into their rectum and then fished around for a few minutes.  The fishing around is extremely uncomfortable.

An experimental group received a treatment which was identical except that at the very end <you can do better than that Beavis> the camera was left in situ <ok that’s pretty good> for an extra 20 seconds or so.  The subjects were interviewed during the procedure and asked to report their level of pain, and after the procedure to report on the procedure overall.  As intended, those in the experimental group reported that the final 20 seconds were less painful than the main part of the procedure.  But the headline finding of the experiment was that those subjects receiving the longer treatment found the procedure overall to be more tolerable than the control group.

This article from New Scientist asks whether sleep walkers can be held morally responsible for acts committed while unconscious.  A different question is what effect a sleepwalker exception would have on crime.  Would it encourage sleepwalkers to commit more crimes, or on the extensive margin would it encourage more to people to take up sleepwalking?

I have no personal experience, but if sleepwalkers believe they are awake, then they would not be motivated by an exemption for sleepwalkers.  Of course at any moment in time all of us may be sleepwalking and assuming we all account for that small probability, a sleepwalker exemption would encourage more crime across the board.  This could be easily compensated by a small, uniform increase in penalties.

We shold worry that non-sleepwalkers will make use of the additional defense at trial (the “jammie defense?”)

Nightcap Nod: Mindhacks.

My mother tells me that where she lives there are cameras that will catch you if you don’t come to a complete stop at the octagonal sign.  Your license plates will be photographed and you will be sent a bill in the mail.  The fine is close to $500.  That’s a lot more than I remember it.

Quiz:  suppose the technology improves for detecting whether a violation has taken place.  Should the fine increase, decrease or stay constant?

Steve Levitt links to his paper with Sudhir Venkatesh documenting some stylized facts about street prostitution in Chicago.  It’s definitely worth a read, and one part is fodder for theory:

Prostitutes in their sample report using condoms 90  percent of the time, compared to only 25 percent in our sample for vaginal sex, and 21 percent for anal sex.  Among their Mexican prostitutes, condom use is the default from which customers must bargain away, potentially inducing large increases in prices.  In contrast, in our sample no condom appears to be the default choice, perhaps making it harder for the prostitute to credibly argue for a higher price if no condom is used.  Moreover, in an equilibrium in which condom use is infrequent, infection rates among prostitutes are likely to be extremely high, so that the primary value of condoms to women may be protecting the women from becoming pregnant and hygiene, rather than the spread of disease.  Indeed, one would expect that the johns would likely gain more in disease reduction from condoms than the prostitutes.


(hmmm, it appears they are not quite done with the paper 🙂 ) They focus on the cost to the prostitute due to increased infection and the like, but there is already some unusual aspects to the demand side.

A John values unprotected sex over protected sex but even moreso if he is the only John, or among very few, who get that privelege.  Holding fixed her frequency of unprotected sex, there is a downward sloping demand for unprotected sex as a function of the price premium over condom-clad.  But that frequency is not verifiable, except insofar as it can be inferred from the price.  Thus, as an equilibrium response the demand curve itself shifts with adjustments to the price.

This means that the prostitute cannot just choose any price.  The price must be such that x% of Johns are willing to pay that price when they assume that x% of other Johns are having unprotected sex.  Typically there will be just a few values of x that satisfy this fixed-point relationship.

So a cross-section of pricing patterns will exhibit a bang-bang (quiet down Beavis) or bi-modal (Beavis!) histogram with high prices and low prices and none in-between.  The high prices correspond to the equlibria in which few Johns have unprotected sex so Johns are willing to pay a lot, and the low prices correspond to the equilibria in which many Johns have unprotected sex and Johns place lower value on it.

It could even happen that the price premium is for protected sex.  In fact it could even be profit maximizing to distort downward the price of unprotected sex in order to signal how risky that would be, enabling the prostitute to raise the price of protected sex.

Should punishment depreciate as time passes?  As usual the answer probably depends on whether you think of punishment as justice or as a mechanism to internalize externalities.

I can see how the demands of justice could be reduced and even expire after many years pass.  One view is that identity evolves and eventually the accused is a different person from the criminal of the past and justice is not served by punishing someone who is effectively a third party.

On the other hand, if the purpose is to deter crime then the passage of time should arguably increase the punishment.  What matters is the perceived cost of the act evaluated at the time of acting.  A fixed penalty (possibly) deferred far in the future imposes a smaller cost.  To compensate for the discounting, the size of the penalty must be larger when it begins later.  Its tempting to say that because the time for acting has already passed there is no retroactive incentive effect from extending the punishment.  But this logic would undermine all penalties after the fact.  Indeed, the incentive theory of punishment relies on prosecutors holding to their commitments presumably because of reputational concerns.

Working against this is the incentive effect on prosecutors.  One reading of a statute of limitations is that it compels prosecutors to make reasonably prompt decisions to bring charges.  We can model this by supposing there is a flow cost of maintaining a defense:  keeping track of the whereabouts of witnesses, preserving documents, coordinating the memories of all involved.  The freedom to delay induces prosecutors to optimally impose costs on the innocent in order to maximize chances of conviction.

Presumably the latter is less of a concern when the criminal has already confessed.

Suppose that a plane has just landed and a flu pandemic may be emerging.  You have the time and resources to check some but not all of the arriving passengers for signs of influenza.  A small fraction of the passengers are arriving from Mexico where the pandemic originated and the others have not been to Mexico.  How do you allocate your searches?

Efficient screening means that the probability of finding an infected passenger should be equalized across the groups that you screen.  And if searches of one group yield a higher infection rate than another then you should allocate your searches to the first group.   Since the passengers arriving from Mexico are much more likely to be infected, you will probably use all of your searches on them.

Even though the passengers from Mexico are being searched disproportionally more often than the others, this is not because you are discriminating against them.  Your motive is simply to use your limited resources most effectively to stop the spread of the virus.

These ideas should be kept in mind when you read articles like this one (via The Browser) which claim that the disproportionate number of searches of black motorists on the highways indicates that the police are racially biased.  The police probably are racists, this would not surprise anybody.  But the fact that they stop and search black motorists more often than whites is not evidence of racism, unless it can be shown that the proportion of stopped black motorists who are found to be committing a crime is smaller than the proportion of stopped white motorists.

In fact, this 2001 paper by Knowles, Persico, and Todd test for this using one particualar data set and find no evidence of bias.  I don’t know where the literature has gone since then, probably there have been other studies with other findings, but its important to know what the right test is.

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