Background Risks and Criminal Activities
|Speaker:||Henry Chiu, University of Manchester|
|Date:||Friday 21 January 2000|
|Location:||Room 106 Streatam Court|
We consider criminal activities for which the punishment if detected effectively eliminates an individual's wealth, as in the case of a long prison sentence or a "maximal fine". It is shown that such criminal activities (as lotteries) become less desirable for an individual who is risk averse and prudent if his initial wealth distribution improves in the sense of first-order or second-order stochastic dominance. If in addition decreasing absolute risk aversion is assumed, then the same result is obtained when insurance policies, whether they are fair or unfair, become available for the initial backround risk. The effect of the avilability of insurance on the level of crime is also considered in a general equilibrium model.