John R. Lott

Bio: John R. Lott is an academic researcher from University of Chicago. The author has contributed to research in topics: Rationality & Price discrimination. The author has an hindex of 3, co-authored 5 publications receiving 217 citations.

Do we punish high income criminals too heavily

Abstract: Many critics believe that since high income criminals can afford to purchase better legal services they are less severely punished than poor criminals who commit equivalent crimes. Others are concerned that the penalties imposed on criminals are “too small.” This paper shows that ignoring the effect conviction has on later earnings dramatically underestimates the total monetary penalty paid by those convicted and that the penalty structure is extremely progressive. Where evidence on the probability of conviction is available, it shows that the highest income criminals face the highest expected penalties.

A guide to the pitfalls of identifying price discrimination

Abstract: This paper demonstrates that plausible cost-based explanations exist for what are commonly perceived to be cases of price discrimination. We explain such commonly discussed problems as the price spreads of retail gasoline products, the “high” price of dinners at restaurants, the “high” price of popcorn at movie theaters, and the fact that airline ticket prices vary with how long the ticket is purchased before the flight's departure. Our explanations benefit from not relying on consumer ignorance or implicit collusion among numerous sellers.

The bias towards zero in aggregate perceptions: an explanation based on rationally calculating individuals

Abstract: I. INTRODUCTION A central theme in the study of economic behavior is individual rationality, or utility maximizing behavior. Contrary to the accusations of many outside critics, the economics assumption of rationality neither denies that information is costly nor implies that decisions are error free. Rational expectations allows for ignorance, but insists on the absence of systematic errors in the aggregate. Even if some individuals make large underestimates, their errors are offset by large overestimates made by others. Alternatively, even if people on average underestimate the effect of some variable during one period, they may overestimate its effect at a later date. These assumptions form the basis for the standard conclusion that the government cannot systematically "outsmart" the public. The theory and application of rational expectations has generated a vast literature over the last couple of decades. It is now well known that the application of rational expectations theory to actual cases may, for instance, be unsuitable when there are systematic errors in the observed variables, when loss functions are not quadratic, or when variables are constrained to take only positive values. While such limitations may well be problematic, these objections have, in our view, not been very damaging in the sense that rational expectations still provides a natural starting point for much economic analysis. Like rational expectations, this paper takes individual rationality as its central theme. Yet, we reach a radically different conclusion from rational expectations regarding aggregate behavior. We demonstrate that individual errors in identifying the relationships among variables cause a downward bias in the aggregate that would be equivalent to the public underestimating the strengths of the true relationships. Rational expectations has considered the "misestimation" type of error, which can "cancel out" in the aggregate, but with errors in identifying relationships, there exists no similar cancelling out effect; and thus the public appears to ("irrationally") underestimate the strengths of relationships. The paper is organized as follows. First we set up a simple formal model to examine the "misestimation problem," and then contrast it to the "identification problem." Section III explains why the identification problem can be so important even when a relatively small number of variables are involved. Section IV reviews empirical evidence of bias in the expectations formation literature. As shown in section V, our hypothesis can be used to explain political business cycles in a standard aggregate supply and demand framework. II. THEORY In our model individuals acquire knowledge in two steps: they first identify the causal relationship between two (or more) variables and then estimate the strength of that relationship. As with Herbert A. Simon's "satisficing" approach [1959; 1979] and the analysis in Ronald A. Heiner [1988], we assume finite intellectual capabilities. However, our model neither assumes nor implies anything about Simon's "satisficing" approach and the often related concept of bounded rationality. Instead, our inquiry is strictly limited to the consequences of omitting variables and will not address the more ambitious question of what strategies individuals might adopt to improve learning. Like Heiner we distinguish between the reliability of making decisions and the issue of obtaining information. Heiner shows that while decision making itself might be flawless when individuals face only a very limited amount of information, it is optimal for them to choose a larger information set and enter into "the imperfect decision zone." He provides several different reasons ("finite channel capacity," "information complexity," and "nonlocal information") for why the advantage of having much information also translates into more decision error. While Heiner's model deals with individuals making correct or incorrect decisions, his underlying reasoning could equally well be used to motivate our analysis of why a portion of the population fails to appreciate certain economic relationships. …

The bias toward zero in identifying relationships: reply to kennedy

Abstract: We will argue that rational expectations has considered only the "misestimation" type of error, which can "cancel out" in the aggregate, but that with errors in identifying relationships, there is no similar cancelling out effect (Fremling and Lott [1996, 276]) Kennedy [1999] misses much of our point. When he extends our two-variable case to a three-variable case, he views agents as exclusively making the traditional "specification errors." As is well known, specification errors concern what variables to include when estimating a regression. He fails to address our main contribution - that people sometimes do not identify that a relationship even exists. When describing our argument Kennedy goes so far as to always replace our references to "[model] identification error" with the term "specification error." For instance, the way he refers to our footnote 5 (p. 279) gives the misleading impression that we ourselves are using the term "specification errors." Our footnote clearly uses the term "identification errors,"(1) and it is only because he switches these terms that he is able to conclude that "Fremling and Lott have violated one of their own assumptions ...." In our 1996 paper we showed the following. Individual actors sometimes are quite clueless as to an economic problem, failing to understand that two (or more) variables are related. We extensively described this "identification problem" on p. 278, and we stated: "The crucial argument in this paper is that at least some people fail to identify a true relationship, and therefore never take the next step, which is to estimate the strength of it. Failing to estimate the strength of a relationship is essentially equivalent to estimating it to be zero." Thus, many do not reach the regression-step at all. When aggregating across individuals making various mistakes, economic behavior at the group level resembles a situation where every individual estimates a regression but underestimates the regression coefficient. Even though all our actors are "rational" - and thus only make non-systematic mistakes in what variable(s) are omitted - the aggregate results could equally well have been generated by a group of non-rational actors systematically underestimating the regression coefficients. In other words, when observing aggregate behavior that contains aggregate systematic errors, one must be cautious not to erroneously infer irrationality on the part of the individuals. Now to Kennedy's numerical example with two independent variables rather than one. How should our analysis be applied? We maintain that there exists a total of eight possible cases: one of correctly recognizing all three variables as being connected, three of missing only one, three of missing two, one of missing all. Kennedy only recognizes four of the cases. This makes an enormous difference. If Kennedy had also included the implicit zero coefficients in the remaining four cases, he would have found a substantial "bias toward zero": for the representative individual, [Alpha] would have been only 4.05 (not 8.09) compared to its true value of 6. Kennedy never mentions his estimate of [Beta], but as a careful reader can deduce, this estimate is only 2.16, a serious underestimate. And including the four other cases with zero's would have yielded a mere average estimate of 1.08, way below its true value of [Beta] = 4. In our view, Kennedy's Monte Carlo experiment merely confirms our results.(2) Kennedy makes it appear that his numerical example corresponds to our macroeconomic modeling in section V. It does not, for he overlooks our explicit assumption that "the general price level cannot be perfectly and immediately observed by the workers ..." (p. 283). This a very classical assumption in macroeconomics and forms the basis for why changes in the nominal wage are sometimes confused with changes in the real wage. …

Armen a. alchian's influence on economics

Abstract: Editor's Note: I wish to thank Special Symposium Editor John Lott for his dedicated, vigorous and hard work in setting up the symposium and then in shepherding the manuscripts through the referee and editing process. I also wish to thank Coeditor Rodney Smith, Claremont McKenna College, for serving as our liaison with the special editor. Along with Editorial Coordinator Carolyn Williams, Professors Lott and Smith put together one of the very best one-day subconferences ever held at a WEA convention. This celebration of the career and influence of Armen Alchian of UCLA, an important and special senior member of our profession, was a wonderful academic experience for all participants, and I trust the insights included in this volume will advance and enrich our thinking about economics as Professor Alchian has throughout his distinguished career. Armen Alchian's influence has been felt in many areas of economics - from law and economics to industrial organization to macroeconomics to finance to basic economic theory. Few economists have the impact in even one area that Armen has had in many fields. Articles like his 1950 piece "Uncertainty, Evolution, and Economic Theory" were seminal pieces that are still widely cited almost half a century after they were published. Yet, Armen's influence stems not only from his articles, but from the truly dominant position that he held in UCLA's economics department. Few students made it through the program without being deeply affected by his penetrating style. Armen is certainly no stranger to the Western Economic Association. He served as its president in 1975, published influential work in Economic Inquiry (Alchian [1969], an article that Armen views as his best paper), and was instrumental in helping the annual WEA meetings take their present form. What follows are six of the nineteen original papers that were presented in his honor at the conference, the roundtable discussion on Armen as a person and his influence, and a piece where Armen offers young scholars five Principles of Professional Advancement. Special thanks go to those who organized the five sessions presenting these papers at the 1994 Western Economic Association Meetings: Louis De Alessi on "Armen Alchian's Theories of Property Rights," Arthur De Vany on the topic of "Armen Alchian's Theories of Evolution," Joseph Kalt on "Armen Alchian's Influence on Public Choice," Jonathan Karpoff on "Armen Alchian's Contributions to Finance and the Theory of the Firm," and Ben Zycher on "Armen Alchian's Influence on Public Policy." Other topic areas were proposed, but failed to materialize solely due to space constraints. Ben Klein also provided some humorous insights into Armen during his luncheon address. Finally, neither the special sessions nor this issue of Economic Inquiry would have taken place without the suggestions and efforts of Rodney Smith. Rod deserves a great deal of thanks. It is a testament to the importance of Armen's article, "Uncertainty, Evolution, and Economic Theory," that three of these six papers deal extensively with it. The first piece, by Harold Demsetz, sets for itself the ambitious goal of showing that for over forty-five years economists have too easily accepted Armen's claim that many economic phenomena can be explained without reference to rationality. Demsetz rejects Alchian's claim that rationality and natural selection are substitute explanations of behavior by claiming that Alchian implicitly requires rationality elsewhere in the model (e.g., the reaction of creditors to losses they bear). Possibly Armen would respond that natural selection and not rationality is what determines which creditors exist; those that lend to the wrong clients or adopt the wrong rules go out of business. We leave to the reader to judge who is right. Arthur De Vany's innovative paper pushes the bounds of the evolutionary discussion by showing how evolution helps us learn, and this in turn helps us understand the different conditions different institutions face. …

The use of knowledge about society

Abstract: Selection of efficient institutions or policies in politics requires constituents to estimate the net benefits of political reforms. Political competition fails to inform constituents of the costs of forgone political alternatives. Ignorance of ‘political opportunity costs’ prevents the adoption of welfare enhancing reforms of public institutions and policies. The empirical record supports this contention.

The Mark of a Criminal Record

Abstract: With over 2 million individuals currently incarcerated, and over half a million prisoners released each year, the large and growing number of men being processed through the criminal justice system raises important questions about the consequences of this massive institutional intervention. This article focuses on the consequences of incarceration for the employment outcomes of black and white job seekers. The present study adopts an experimental audit approach—in which matched pairs of individuals applied for real entry‐level jobs—to formally test the degree to which a criminal record affects subsequent employment opportunities. The findings of this study reveal an important, and much underrecognized, mechanism of stratification. A criminal record presents a major barrier to employment, with important implications for racial disparities.

Criminal Deterrence Research at the Outset of the Twenty-First Century

Abstract: Evidence for a substantial deterrent effect is much firmer than it was two decades ago. However, large gaps in knowledge on the links between policy actions and behavior make it difficult to assess the effectiveness of policy options for deterring crime. There are four major impediments. First, analyses must estimate not only short-term consequences but also calibrate long-term effects. Some policies that are effective in preventing crime in the short term may be ineffective or even criminogenic in the long run because they may erode the foundation of the deterrent effect-fear of stigmatization. Second, knowledge about the relationship of sanction risk perceptions to policy is virtually nonexistent; such knowledge would be invaluable in designing effective crime-deterrent policies. Third, estimates of deterrent effects based on data from multiple governmental units measure a policy's average effectiveness across unit. It is important to understand better the sources of variation in response across place a...

The Reputational Penalty Firms Bear from Committing Criminal Fraud

Abstract: OPTIMAL penalties for corporate fraud require that firms face expected penalties equal to the total social costs of the crime. Yet formal courtimposed sanctions for committing fraud often represent a small fraction of the damage produced by the fraud. Alain Sheer and Chih-Chin Ho, for example, estimate that the median and mean ratios of criminal fines to the private loss from private fraud were .14 and .73 in 1988. The corresponding median and mean ratios for government procurement

The economics of crime

Abstract: Crime is a major activity in the US, with implications for poverty and the allocation of public and private resources The economics of crime focuses on the effect of incentives on criminal behavior, the way decisions interact in a market setting; and the use of a benefit-cost framework to assess alternative strategies to reduce crime This essay shows that most empirical evidence supports the role of incentives in the criminal decision: legitimate labor market experiences, sanctions including incarceration, and the risk of apprehension all influence decisions to engage in crime By putting crime into a market setting, economic analysis highlights the difficulty of reducing crime through incapacitation: when the elasticity of supply to crime is high, one criminal replaces another in the market; and thus the importance of deterring crime by altering behavior Most analyses show that "crime pays" in the sense of offering higher wages than legitimate work, presumably in part to offset the risk of apprehension But some important facts about crime -- long term trend increases and decreases; the geographic concentration of crime; the preponderance of men and the young in crime -- seem to go beyond basic economic analysis