European Economic Review 46 (2002) 859 869 www.elsevier.

com/locate/econbase

Social Norms

Crime in the lab-detecting social interaction

Armin Falka; b; c; , Urs Fischbachera
a Institute

for Empirical Research in Economics, University of Zurich, Blumlisalpstrasse 10, CH-8006 Zurich, Switzerland b Centre for Economic Policy Research, London, UK c CESifo, Munich, Germany

Abstract According to the standard economic perspective, criminal activities vary with the price of crime, which depends on the severity of punishment and the detection probability. An alternative view claims that crime is also in uenced by social interaction phenomena, such as peer pressure or neighbourhood e ects. Detecting social interaction in the eld is fraught with di culties, however. In this paper, we argue that given its extensive control possibilities, experiments are well suited to show the potential existence of social interaction e ects. We present an experimental study where people can engage in criminal activities. We nd support for the importance of social interaction: On average subjects steal the more, the more others steal. This behaviour can be interpreted in terms of reciprocity. c 2002 Published by Elsevier Science B.V.
JEL classication: H41; C91; K42; H26 Keywords: Social interaction; Conditional cooperation; Crime; Reciprocity; Experiments

1. Introduction According to the standard economic perspective, criminal activities vary with the price of crime, which depends on the severity of punishment and the detection probability. Alternatively, it has been argued that criminal activity is in addition at least partly driven by social interaction phenomena, such as peer pressure or neighbourhood e ects. Glaeser et al. (1996), e.g., identify social interaction as an important determinant of criminal activity. Similarly, Ludwig et al. (2001) argue that the opportunity to move to lower-poverty neighbourhoods reduces criminal behaviour by teens.

Corresponding author. E-mail addresses: falk@iew.unizh.ch (A. Falk), ba@iew.unizh.ch (U. Fischbacher).

0014-2921/02/$ - see front matter c 2002 Published by Elsevier Science B.V. PII: S 0 0 1 4 - 2 9 2 1 ( 0 1 ) 0 0 2 2 0 - 3

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While this evidence is highly suggestive, the identication of social interaction with eld data is fraught with di culties. Social interaction means that people condition their behaviour on the behaviour of other people in their environment, e.g., on the behaviour of their peers or neighbours. As a consequence one should see correlated behaviours in neighbourhoods, regions or cities. But of course, social interaction is not the only reason why one might observe correlated behaviour (Manski, 1993, 2000; Ichino and Maggi, 2000): First, correlated behaviour may simply be the consequence of di erent neighbourhood characteristics the researcher can never completely control for. Second, people with similar characteristics may self-select into neighbourhoods. This also produces correlated behaviour but has nothing to do with social interaction. With the usually available eld data it is extremely di cult if not impossible to di erentiate between social interaction, environmental characteristics and self-selection. On top of this it is far from evident in the eld what actually determines the relevant group of comparison. Is it geographic proximity or ethnic similarity? How is a neighbourhood dened, by the people living in the same block, or in the same census track or in the same city? Are people in uenced at all by their neighbours or rather by people at their workplace or at a club or by friends (who may live anywhere in the world)? The answer to this type of question is usually dictated by the availability of appropriate data. Finally, eld data are plagued with measurement errors. Even if all of the above problems are resolved and the researcher is sure that he has identied the existence of social interaction, he faces the problem of identifying the exact process or source of social interaction. As Manski (2000) has pointed out there are di erent channels through which social interaction can be operative. Examples comprise statistical discrimination, strategic considerations or observational learning. Depending on the exact channel through which social interaction is operative, possible policy implications may be very di erent. It is therefore of great importance not only to show the existence of social interaction but also to nd out about its sources. In this paper we argue that controlled laboratory experiments provide a valuable tool to study social interaction phenomena. In contrast to eld studies, laboratory experiments can provide direct evidence for social interaction. Due to the extensive control possibilities it is furthermore possible to determine the sources of social interaction. In the following we discuss an experiment where subjects can steal money from each other. The key feature of our set-up is that people can make stealing decisions conditional on the behaviour of their group members. In a certain sense we put subjects in various neighbourhoods at the same time some in which people steal a lot, and some where stealing is less present or absent. Our main nding is that on average subjects steal the more the more others engage in criminal activity. On an individual level we nd substantial heterogeneity: Some subjects display no interaction e ects and always fully steal from their group members regardless of their group members actions. This type of behaviour coincides with the behaviour predicted by standard economic theory. Since in the experiment it is a dominant strategy to fully steal, selsh and rational subjects should indeed steal as much as they can, independent on the behaviour of their group members. The other type of subjects shows a behaviour that is in uenced by the behaviour of the other group members: Stealing of these subjects is monotonically increasing in the stealing

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level of their group members. The latter type of behaviour can be interpreted in terms of reciprocity. 1 Reciprocity means the propensity to reward kind and to punish unkind behaviour of others. In the experiment it is clear that refraining from stealing is a kind act. If the others do not steal, reciprocal subjects therefore also refrain from stealing, i.e., they conditionally comply with the norm that one should not steal. In the next section we describe the experiment in detail. Section 3 discusses why the design is suited to discover social interaction and presents our behavioural hypotheses. Our main ndings are given in Section 4. The nal section concludes and discusses some policy implications. 2. Experimental design The basic idea of our experiment is to put experimental subjects into a situation where (i) they can engage in a criminal activity (stealing from each other) and (ii) where each subject has to decide on a stealing decision conditional on the stealing behaviour of others. If we observe that people do in fact condition their behaviour on the behaviour of others, we have direct evidence for social interaction. The experiment consists of two main parts. In the rst part, subjects earned points (or property) while in the second part they could steal points from each other. Part 1. In the rst part of the experiment, subjects could earn points. The reason why we had subjects earn their points as opposed to just giving them a xed endowment was to strengthen the idea of own property. Previous experiments have shown that the very fact that subjects have to put forward some e ort or show di erent abilities creates credible and e ective entitlements (Ho man and Spitzer, 1985; Gachter and Riedl, 2001). Subjects earned points by giving correct answers to a set of 40 general knowledge questions. The questions touched issues concerning politics, the sciences, arts and music, history, sports and so on. All subjects were asked the same questions. Together with each question subjects were presented ve possible answers on their computer screen, one of which was correct. 2 The time limit to answer a question was 30 seconds. After this time, subjects were automatically shown the next question. For each correct answer a subject received one point, i.e., each subject could earn 40 points at maximum. Wrong answers did not change a subjects income. When all questions had been answered, each subject was privately informed about his or her income yi . Then subjects were introduced to the second part of the experiment which they did not know about before. Part 2. In the second part of the experiment the actual stealing experiment all subjects were randomly and completely anonymously allocated into groups of four. Within a group, each subject was now allowed to take away between 0 and 20 points from the other three group members. 3 If e.g., a subject decided to take away
1 For experimental evidence and a discussion on reciprocity see Falk and Fischbacher (2000) and Fehr and Gachter (2000). 2 For example, one question was: Which mountain is the highest mountain in Switzerland? 1 = Rigi; 2 = Dufourspitze; 3 = Eiger; 4 = Matterhorn; 5 = Piz Bernina. (The correct answer is 2.) 3 In the instructions we avoided value laden terms like stealing. Instead we phrased the decision as the possibility to take away points from other group members.

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nine points, each other group members income was reduced by three points. Each point taken away from the other group member was worth 0 points to the subject who took the point. Formally, the income i for subject i was calculated as 1 (1) xj ; i = yi + x i 3
j=i

where xi {0; 1; : : : ; 20} are the points subject i takes away from the other group members and 1 j=i xj is the sum of points the others steal from subject i. 3 The exact procedure involved two types of decision: 4 The rst was to decide on stealing decisions xi {0; 1; : : : ; 20} for each of the 21 possible average stealing decisions of the other group members (rounded to integers). Thus each subject had to state how many points he or she wanted to steal from the others given that the others stole 0; 1; : : : or 20 points on average. In other words subjects made a conditional decision given that they were in a good environment where the others steal nothing or in an increasingly bad environment, where the others steal 1; 2; : : : 20 points on average. Subjects made their 21 conditional stealing decisions with the help of a table displayed at their computer screen. When subjects had lled out the table, they were presented a new screen where they had to insert their second type of decision. This decision was simply a single stealing decision, i.e., subjects had to indicate how many points they wanted to take away from their other three group members. Both types of decisions were made without knowing the other subjects decisions. To give subjects a monetary incentive to take both types of decisions seriously and to ensure that potentially all 22 decisions could become relevant stealing decisions, we employed the following procedure: After all subjects had made both types of decisions a random mechanism determined which of the two types of decisions was relevant for the determination of actual payo s. In each group one subject was randomly selected. For this subject the rst type of decision became relevant, while for the other three group members, the second type of decision was payo relevant. This procedure ensured that both the 21 entries in the table and the unconditional stealing decision were potentially payo relevant for all players. Formally the second part of the experiment is an extensive form game with the following order of moves: First, nature chooses three players who simultaneously make their unconditional stealing decision. The fourth player learns the rounded average of these decisions and then decides on his stealing decision. All players learn whether they are the fourth player. In case they are not the fourth player they do not learn who the fourth player is. Treatments. We study two treatments. In the low treatment (henceforth L-treatment) was set equal to 0.5, while in the high treatment (H-treatment) was set equal to 1. 5 The H-treatment re ects a situation where stealing is a mere transfer without e ciency consequences. If everybody fully steals, all end up with 20 points just as it is the case if nobody steals anything. In the L-treatment on the other hand stealing is
4 5

A similar kind of procedure has been applied to a public goods game in Fischbacher et al. (2001). The rst part of the experiment was the same in both treatment conditions.

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highly ine cient. If everybody fully steals, all end up with only 10 points. We are interested in studying both treatments for two reasons. First, some economists have argued that stealing is just a transfer between the thief and his victim and does not involve e ciency losses or gains. Others have denied that view because it is unlikely that a particular good yields the same utility to two di erent persons. Moreover, being a victim of a theft usually causes psychic damage beyond the material loss. These psychic costs of crime can be quite substantial. Our two treatments allow for both scenarios. Second, e ciency considerations may shape the nature of social interaction e ects (see our discussion below). Procedure. When both parts of the experiment were over, subjects received a show-up fee (10 Swiss Francs) and their points earned in the two parts of the experiment. Points were exchanged into Swiss Francs (at a rate of 1 point = 1 Franc) and paid in cash. In the instructions we explained the experimental procedure in great detail and we also provided an oral summary. Moreover, subjects had to correctly answer several control questions before the experiment started. The experiment was conducted at the computerized experimental lab of the University of Zurich. We used z-Tree (Fischbacher, 1999) as experimental software. In total 92 subjects participated in the experiment: 44 subjects (11 groups) in the H-treatment and 48 subjects (12 groups) in the L-treatment. The experiment was played only once which implies that we have 92 independent observations. 3. Why does this design potentially detect social interaction? The design of the experiment just outlined allows studying social interaction in a highly controlled environment, which circumvents the identication problems associated to eld data. First, we control for selection e ects since group assignment and therefore group composition is completely random. Second, the design controls for group or neighbourhood characteristics because all groups are exactly the same (same size, same payo - and information conditions, etc.). Third, we face no measurement problem and are sure to know the relevant group of comparison because subjects have information only about the group they are actually allocated to. The extensive control possibilities allow us not only to unambiguously show the potential existence of social interaction but also to identify reciprocal preferences as a source of social interaction. 6 A reciprocal subject has a concern for his own monetary payo but also rewards kind actions and punishes unkind actions, i.e., his preference ordering (on his actions) depends on the actions of others. Formally, the concept of reciprocity requires a distinction between utility and payo . A reciprocal player is utility is not simply his or her payo i but depends in addition also on the payo s of the other players. In Falk and Fischbacher (1999) the notion of reciprocity
We do not claim that other sources of social interaction are irrelevant. For instance, interactions based on strategic considerations are very important in any repeated situation. In repeated interactions, though, it is almost impossible to discriminate between reciprocity and strategic considerations as sources of social interaction. The present design allows to show that even if other forms of social interaction can be ruled out, social interaction based on reciprocity is still prevalent.
6

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is formalized in a rigorous way. 7 Applied to our experiment their model predicts that a reciprocally motivated subject steals the more, the more the others take away from him. In equilibrium the optimal stealing decision xi of a reciprocal subject equals xi =min( 1 j=i xj + =( i ( +1=3)); 20) if i 0 and 20 if i =0, where i 0 indicates 3 the reciprocal inclination of subject i. 8 Thus, a su ciently reciprocal players stealing is an increasing function of 1 j=i xj . The intuition for this prediction is that if the 3 others refrain from stealing and choose low or zero stealing levels, this is perceived as a kind act which is reciprocated, i.e., a reciprocal subject sacrices material payo in order to reward kind group members. Of course, if the others steal a lot, a reciprocal subject does so as well. Reciprocity is not unconditional altruism but a conditional behaviour. Notice that xi is increasing in , which implies that there should be more stealing in the H- compared to the L-treatment. The intuition for this result is that for higher , it is more expensive to be reciprocal, i.e., for a given reciprocal inclination i subjects steal more the higher . By the same token the fraction of selsh behaviour should be higher in the H- than in the L-treatment. The stealing schedule re ects the individual best response functions and thus allows detecting di erent types of preferences. Selsh players should show a at stealing schedule where they always steal 20, irrespective of the behaviour of other group members (this holds since @ i =xi = 0). Since the game is played only once they have no strategic reasons to behave di erently. For su ciently reciprocal players we should see that xi is in fact increasing in j=i xj . Since the stealing schedules allow subjects to condition their behavior on that of the other players, beliefs about the behaviour of other players are irrelevant. This distinguishes our design from typical simultaneous move games where the researcher cannot easily di erentiate between di erent types of behaviour because he does not know what beliefs subjects hold. 9 4. Results Our main results are shown in Figs. 1 and 2. Both gures are based on the stealing schedules and show average stealing patterns dependent on the stealing of others. While Fig. 1 shows the behaviour in the L-treatment, Fig. 2 displays behaviour in the H-treatment. In both gures we have classied di erent kinds of patterns. In Fig. 1 we nd four types of behaviour: 44 percent of the subjects behave completely selsh, i.e., they take 20, regardless of the average stealing of others (selsh). Since the behaviour of these subjects does not depend on the behaviour of others, it does not give rise to social interaction e ects. However, 42 percent of the subjects are
7 Other fairness models comprise, e.g., Rabin (1993), Fehr and Schmidt (1999), Bolton and Ockenfels (2000), Dufwenberg and Kirchsteiger (1998) or Charness and Rabin (1998). 8 The formal derivation of this prediction is very similar to the prediction for public goods games in Falk and Fischbacher (1999). This prediction is built on the assumption that the subjects believe that all subjects earned the same amount of money in the rst part of the experiment. 9 For example, if in a standard Prisoners Dilemma or Public Goods experiment a subject defects, it can be that this subject is either selsh (holding any belief ) or reciprocal (holding the belief that the opponent also defects).

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20 18 16 14 Own stealing 12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Average stealing of others

Fig. 1. Conditional stealing in the L-treatment.
selfish: 44% conditional: 42% other: 13% altruist: 2% all types

20 18 16 14 Own stealing 12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Average stealing of others

Fig. 2. Conditional stealing in the H-treatment.

selfish: 59% conditional: 36% other: 5% all types

reciprocally motivated, i.e., their stealing decision is monotonically increasing in the stealing level of the other group members. In Fig. 1 the line with the boxes shows the average stealing schedule of these reciprocal players (conditional). This average schedule is monotonically increasing and approximately concave in the stealing of others. It unambiguously reveals the existence of social interaction. Fig. 1 also shows one

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80% 70% 60% 50% 40% 30% 20% 10% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 L-Treatment H-Treatment

Fig. 3. Relative frequency of unconditional stealing decisions in the L- and the H-treatment.

subject who behaves altruistically (altruist). This subject steals nothing, independent of the behaviour of others. Finally there are 13 percent of the subjects who show a somewhat irregular pattern (other). The thin line in Fig. 1 displays the average schedule of these subjects. Even though the behaviour of these subjects is non monotonous, they also show an increasing slope on average. Fig. 2 is constructed in the same way as Fig. 1. The general picture looks very similar. Again there are predominantly selsh and reciprocal types while only 5 percent show an irregular pattern. As in the L-treatment, the behaviour of the latter gives on average rise to a positive relation between own stealing and stealing of others. As predicted by Falk and Fischbacher (1999) the fraction of players who exhibit selsh behaviour is somewhat higher in the H- than in the L-treatment (59 and 44 percent, respectively). This di erence is statistically signicant (Fisher exact test, p-value = 0:057, two-sided). The di erence in the number of reciprocal players is not signicant (p = 0:14) while the di erence in other types is signicant (p = 0:08). Taken together, Figs. 1 and 2 show the existence of reciprocal types and therefore of social interaction: If we take the average over all individual schedules, we get a monotonically increasing schedule both in the L- and the H-treatment. Figs. 1 and 2 also reveal that roughly 50 percent of the players display selsh behaviour and that the number of these selsh players is lower when stealing is ine cient. The fact that behaviour is more selsh in the H- than in the L-treatment is corroborated by the unconditional stealing decisions. Figure 3 shows the relative frequency of the unconditional stealing decisions, which are based on the second type of decision subjects had to make. The gure reveals two important ndings. First, the general stealing level is quite high and second, subjects steal more in the H- than in the L-treatment. This di erence is statistically signicant (p 0:037 Wilcoxon rank-sum test, two sided).

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5. Policy implications and discussion The preceding discussion has unambiguously revealed the importance of social interaction both on an individual as well as on an aggregate level. A large fraction of our subjects can be classied as conditional norm violators, i.e., their propensity to comply with the norm that one should not steal increases as the level of stealing in their environment decreases. Similar ndings in public goods are reported in Croson (1998), Sonnemans et al. (1999), Keser and van Winden (2000), and Fischbacher et al. (2001). Further support comes from an interesting series of eld experiments reported in Cialdini et al. (1991). In their study they investigate whether people litter in an already littered environment at a greater rate compared to a clean environment. In one of their set-ups they manipulate a parking garage: In one treatment it was sprinkled with litter while in the other treatment all traces of litter were removed. They nd more littering in the littered parking garage than in the clean one. Our ndings imply that those people who behave conditionally on their environment should be more likely to be criminal in a bad than in a good neighbourhood. This is what Ludwig et al. (2001) nd in their randomized housing-mobility study. They study the e ects of relocating families from high- to low-poverty neighbourhoods in Baltimore. They nd that juvenile arrest rates are indeed lower for those families who are provided the opportunity to move to lower-poverty neighbourhoods. Similarly, Case and Katz (1991) report that an individuals probability to be involved in crime varies positively with the proportion of other youths that are involved in crime. Taken together the evidence suggests that contrary to what is often assumed in standard economics of crime criminal activity is not solely driven by its price but is also shaped by social interaction. The existence of social interaction, i.e., conditional behaviour, implies the possibility of multiple equilibria: In a low crime environment conditional behaviour actually leads to low crime rates while in a high crime environment, people have a higher propensity to commit crimes. 10 In the presence of multiple equilibria, beliefs about the behaviour of others are crucial because dependent on what people believe their behaviour changes. This opens the possibility for an interesting policy measure, namely to shape peoples beliefs such that people coordinate on good equilibria. Such a belief-management can operate, e.g., by suppressing visible disorder in trains, neighbourhoods or public places. Visible disorder can be interpreted as a self-reinforcing cue about the prevalence of norms or the neighbourhoods attitude towards crime (Kahan, 1997). If there is a lot of visible disorder in a neighbourhood or community, people may come to the belief that norms are not intact and behave accordingly. Support for this view comes from a study by Skogan (1990), which shows that public disorder in urban neighbourhoods is highly correlated with crime rates in these neighbourhoods.
10 Notice that even if social interaction is absent, multiple equilibria may arise. For example, if police resources are limited, the detection probability for committing crime decreases in the number of those who commit a crime. It may therefore be rational to commit a crime if su ciently many others do as well. Notice that in our experiment this type of multiple equilibria is ruled out because each player has a dominant strategy to fully steal. The point is that even in environments where the standard economic prediction yields a unique equilibrium, social interaction may give rise to multiple equilibria.

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The coordination on good equilibria is also of potential interest for the debate on tax evasion. The traditional perspective claims that tax compliance can be improved only by either increasing nes or the detection probability. Our analysis suggests that beyond material incentives, there is a willingness to pay taxes that relies on social norms and social interaction processes. In particular we believe that the willingness to pay taxes rests crucially on the expectation that others pay their taxes as well. 11 Policies that aim at improving tax compliance should recognize the social interaction e ects of tax compliance and should try to make use of it in a productive way. Acknowledgements Financial support by the MacArthur Foundation (Network on Economic Environments and the Evolution of Individual Preferences and Social Norms) is gratefully acknowledged. We thank Ernst Fehr, Simon Gachter, Steve Pischke and the participants of the EEA-meeting 2001 in Lausanne for helpful comments and Maria Clodi for research assistance. References
Bolton, G., Ockenfels, A., 2000. A theory of equity, reciprocity and competition. American Economic Review 90, 166194. Case, A.C., Katz, L.F., 1991. The company you keep: The e ects of family and neighborhood on disadvantaged youths, NBER Working Paper No. 3708, Cambridge, MA. Charness, G., Rabin, M., 1998. Some simple tests of social preferences and a new model, Discussion paper, University of California, Berkeley, CA. Cialdini, R.B., 1992. Social motivations to comply: Norms, values, and principles. In: Roth, J.A., Scholz, J.T (Eds.), Taxpayer Compliance, Vol. 2. University of Pennsylvania Press, Philadelphia, PA, pp. 200227. Cialdini, R.B., Kallgren, C.A., Reno, R.R., 1991. A focus theory of normative conduct: A theoretical renement and re-evaluation of the role of norms in human behavior. In: Zanna, M.P (Ed.), Advances in Experimental Social Psychology, Vol. 24. Academic Press, New York, pp. 201234. Croson, R., 1998. Theories of commitment, altruism and reciprocity: Evidence from linear public goods games, OPIM Working paper, Wharton School of the University of Pennsylvania, Philadelphia, PA. Dufwenberg, M., Kirchsteiger, G., 1998. A theory of sequential reciprocity, Mimeo., CentER for Economic Research, Tilburg. Falk, A., Fischbacher, U., 1999. A theory of reciprocity, Working paper No. 6, Institute for Empirical Research in Economics, University of Zurich, Zurich. Falk, A., Fischbacher, U., 2000. The economics of reciprocityTheory and evidence. In: Freeman, R. (Ed.) Inequality Around the World: Where Are We and Where Are We Headed. Palgrave, London. Fehr, E., Gachter, S., 2000. Fairness and retaliation: The economics of reciprocity. Journal of Economic Perspectives 14, 159181. Fehr, E., Schmidt, K., 1999. A theory of fairness, competition and cooperation. Quarterly Journal of Economics 114, 817851.
11 Summarizing previous research on that matter social psychologist Cialdini notes that admitted noncompliers are more likely to estimate high levels of noncompliance within the general public : : : and there is a clear positive relationship between self-reported evasion and the tax evasion of friends and relatives: : : (Cialdini 1992, S. 215).

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