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Economic freedom and public, non-market institutions: evidence from criminal prosecution

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Abstract

Economic freedom, which measures the protection of property and freedom to contract, is generally argued to capture the quality of a state’s institutions regarding market activity. As to be expected, numerous studies have found that economic freedom is associated with good economic outcomes. Additionally, much effort in public economics has worked to identify the features of quality non-market public institutions. No effort has been made to connect institutions that influence market activity and institutions that govern non-market activities. We take a first step. We employ a linear programming method for measuring relative efficiencies known as Data Envelopment Analysis. We apply this technique to information on the use of inputs to the production of the prosecution of crime across the thousands of local prosecutor offices in the U.S. We then compare state-level measurements of prosecution productivity with data on state-level economic freedom from the Economic Freedom of North America index. We show that there is a positive and statistically significant relationship between the two. Those states that develop institutions respecting economic freedom also tend to be the states that develop efficient publicly-provided services. The results are extended to complementary economic freedom measurements.

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Notes

  1. See Bandyopadhyay and McCannon (2014, (2015, (2016) for a detailed discussion of the effect of election concerns on prosecution decisions and Rasmusen et al. (2009) regarding the effect of budgets on decisions made.

  2. The only study which investigates anything similar is that of Levendis and Stringham (2010). Using the Economic Freedom of the World index they show that economic freedom is correlated with lower rates of murder. Related to the central theme of our paper, Brunetti and Weder (2003) find evidence of a relationship between more free press and less corruption. Free press can be thought of as one component of economic freedom and corruption as an alternative measurement of the quality of governance. Similarly, while not directly about economic freedom, Karahan et al. (2006) investigation corruption by local public officials and its correlation with characteristics of the counties.

  3. The subnational measurement, as used her, includes three areas. Area 1 measured government expenditures, transfers and subsidies, and social security payments. Area 2 measures tax revenues, top marginal tax rate, indirect tax revenue, and sales taxes. Area 3 measures labor market freedom (minimum wage laws, government employment, unionization), regulation of credit markets (bank ownership, private sector credit, and interest rate controls), and business regulation (administrative requirements, bureaucracy costs, starting a business metric, bribes, licensing, and tax compliance).

  4. There are a few exceptions, such as the use of private investigators, private prisons, and criminal defense. Furthermore, there are calls for privatization of some of these publicly-provided services. For example, Koppl (2005) argues for allowing a market for forensic science used in trials. These issues, though, are beyond the scope of the present study.

  5. A few states use two, six, or eight year terms. There are four states that do not elect their chief prosecutor. They are Alaska, Connecticut, New Jersey, and Rhode Island.

  6. We would like to thank an anonymous referee for raising this idea as a possibility.

  7. McCannon (2014) presents experimental evidence that individuals who have a strong preference for economic freedom are more willing to make wealth-creating investments in others, even without formal contracts or enforcement. Thus, pro-social behaviors may be more prevalent amongst those with strong preferences for economic freedom.

  8. The subnational scores omit Federal government transfers and, hence, are better measurements of differences in state policy.

  9. Given that the data are survey results, offices are free to code part-time workers in the way they feel is appropriate. Thus, for example, a worker who is employed for three months could be reported as \(1/4^{t h}\) of a worker.

  10. Gorman and Ruggiero (2009) limit their analysis to districts with populations between 100, 000 and 500, 000. In 2007 this range constitutes only \(20.3\,\%\) of the offices in the U.S. As a consequence, though, many of these data issues are not present there.

  11. The results presented use the 2010 state real GDP (chained to 2009 dollars) of the Bureau of Economic Analysis (www.bea.gov). Using other years does not affect the results.

  12. Fiscal policy measurements are decomposed into five categories: tax burden, government employment, government spending, government debt, and fiscal decentralization. Regulation is comprised of seven categories: tort abuse, property right protection, health insurance freedom, labor market freedom, occupational licensing freedom, cable/telecom freedom, and miscellaneous. Personal freedom includes a total of twelve categories.

  13. The mean value of F50 is \( -2.037\) with a standard deviation of 40.703 (ranging between \( -152.36\) and 63.793). The mean value of F50-EconFree is \( -3.582\) with a standard deviation of 37.423 (ranging between \( -138.73\) and 60.050).

  14. All county-level control variables are obtained from censtats.org and are from the year 2007 (to match the data analysis previously done).

  15. One can think of the results, then, as exploring the mechanism behind the findings in Bjornskov (2015) where economic freedom is shown to affect crime, and we explore the relationship between prosecution and the effect of crime on prosecution.

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Acknowledgments

We thank John Ruggiero for help with the prosecutor data and Dennis Coates, Adam Martin, Dean Stansel, Ben Powell, and Andy Young for comments and advice. Finally, we appreciate comments from the seminar participants at Texas Tech University, Association of Private Enterprise Education, Eastern Economic Association, and Western Economic Association International meetings.

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Authors and Affiliations

  1. University of Corsica, UMR CNRS 6240 LISA, 20250, Corte, France

    Claudio Detotto

  2. Department of Economics, West Virginia University, P.O. Box 6025, Morgantown, WV, 26506, USA

    Bryan C. McCannon

Authors
  1. Claudio Detotto
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  2. Bryan C. McCannon
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Correspondence to Bryan C. McCannon.

Appendix

Appendix

The following table provides the state rankings, as of 2007, for economic freedom (both the Economic Freedom of North America and Freedom of the 50 States indices) and technical efficiency (Table 8).

Table 8 State rankings
Full size table

Table 9 presents the specification in I of Table 3 with alternative measurements of technical efficiency. The first column excludes population as an output variable. The second column excludes convictions as an output variable.

Table 9 Alternative DEA calculations (\(N = 50\))
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Finally, the EFNA can be decomposed into its three components. Table 10 re-estimates column I of Table 3, inserted the components in for EFNA.

Table 10 Decomposition of EFNA (dependent \(\hbox {variable} = {TE}; N = 50\))
Full size table

There is a substantial amount of multicollinearity between the three components. Thus, in IV each is statistically insignificant. Individually, though, each is highly correlated with the technical efficiency of the prosecutor office production. Thus, it is economic freedom overall, and not one particular component to economic freedom, that provides the main result.

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Detotto, C., McCannon, B.C. Economic freedom and public, non-market institutions: evidence from criminal prosecution. Econ Gov 18, 107–128 (2017). https://doi.org/10.1007/s10101-016-0183-3

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