Working Paper: NBER ID: w12641
Authors: Rafael Di Tella; Juan Dubra
Abstract: We observe that countries where belief in the "American dream" (i.e., effort pays) prevails also set harsher punishment for criminals. We know from previous work that beliefs are also correlated with several features of the economic system (taxation, social insurance, etc). Our objective is to study the joint determination of these three features (beliefs, punitiveness and economic system) in a way that replicates the observed empirical patterns. We present a model where beliefs determine the types of contracts that firms offer and whether workers exert effort. Some workers become criminals, depending on their luck in the labor market, the expected punishment, and an individual shock that we call "meanness". It is this meanness level that a penal system based on "retribution" tries to detect when deciding the severity of the punishment. We find that when initial beliefs differ, two equilibria can emerge out of identical fundamentals. In the "American" (as opposed to the "French") equilibrium, belief in the "American dream" is commonplace, workers exert effort, there are high powered contracts (and income is unequally distributed) and punishments are harsh. Economists who believe that deterrence (rather than retribution) shapes punishment can interpret the meanness parameter as pessimism about future economic opportunities and verify that two similar equilibria emerge.
Keywords: No keywords provided
JEL Codes: E62; K14; K42; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Belief in the American Dream (P17) | Harsher punishments on criminals (K42) |
| Belief in the American Dream (P17) | Economic contracts (K12) |
| Economic contracts (K12) | Criminal behavior (K42) |
| Belief in the American Dream (P17) | Worker effort (J29) |
| Worker effort (J29) | Economic contracts (K12) |
| Worker effort (J29) | Criminal behavior (K42) |
| Economic contracts (K12) | Harsher punishments on criminals (K42) |
| Belief in the American Dream (P17) | Penal system (K40) |