IDENTIFYING EFFICIENT CRIME-COMBATING POLICIES BY VAR MODELS: THE EXAMPLE OF SWITZERLAND PATRICIA FUNK and PETER KUGLER* Current research suggests that the crime-combating instrument sentence probability is more effective than sentence severity. However, the focus of the simultaneous (or very short-run) impact of the law enforcement policy on crime impedes a comparison of these two instruments with respect to their long-term effectiveness. With Swiss data, this article investigates the dynamic interrelationships between enforcement policy and crime and finds that overall, sentence severity is about the same effective as sentence probability. Furthermore, the authors show how the VAR-modeling technique can be exploited to conveniently distinguish between deterrence and incapacitation effects. More concrete recommendations toward a cost-effective crime-reduction policy can be derived. (JEL C32, K42) I. INTRODUCTION The seminal economic model of crime (Becker, 1968), claiming that crime can be reduced by increasing either the probability or the severity of punishment, has triggered a huge amount of empirical research. On one hand, the aim was to test the empirical rele- vance of Becker's model of crime; on the other hand, information was desired to be gained concerning the relative effectiveness of higher sentence probability and harsher sentence severity. Obviously, in view of the growing amount of resources governments are spending on crime deterrence, knowledge about the crime-reducing power of these two policy instruments is crucial to achieve optimal resource allocation. More precisely, a hint as to whether crime should be combated by spending more on police (thereby increasing the probability of a sentence) or by convict- ing to longer prison sentences (thereby increas- ing the severity of a sentence) would be of greatest importance. Unfortunately, results published so far allow for no clear-cut policy recommendations. Studies based on individual data suggest that the number of rearrests for released prisoners decreases with longer prison sentences experi- enced in the past as well as higher percentages of convictions (given arrest). 1 However, the specific sample selection makes more general recommendations for crime policy difficult. More interesting for this purpose are studies based on aggregate data. Findings from cross-sectional analyses mostly indicate that sentence probability is more effective in redu- cing crime than sentence severity (i.e. the [absolute] elasticity of the former is larger). 2 However, several flaws inherent in all these cross-sectional analyses (such as the impossi- bility of controlling for unobserved heteroge- neity among the countries) fostered the emergence of panel data estimates with fixed effects. In panel data studies, differences between sentence probability and severity became even more apparent. Whereas higher arrest (and conviction) rates still showed a crime-inhibiting impact, the effect of longer 1. See, for example, Witte (1980), Trumbull (1989), Grogger (1991), and Tauchen et al. (1993); an exception is Myers (1983). 2. The earliest study is Ehrlich (1973). For an overview of later studies, see Cornwell and Trumbull (1994). *This is a revised version of a paper presented at the WEAI's 76th annual conference 2001, San Francisco, in the Time Series Econometrics session organized by R. Bradley. The authors would like to thank Marc-Andre Gosselin and two anonymous referees from Contemporary Economic Policy for helpful comments. Financial support of the WWZ-Fo È rderverein is gratefully acknowledged. Funk: Postdoctoral Research Fellow, Department of Economics (WWZ), University of Basel, Petersgraben 51, CH-4003 Basel, Switzerland. Phone 41-61-260 12 64, Fax 41-61-260 12 66, E-mail patricia.funk@unibas.ch Kugler: Professor of Economics, Department of Economics (WWZ), University of Basel, Petersgraben 51, CH-4003 Basel, Switzerland. Phone 41-61-260 12 61, Fax 41-61-260 12 66, E-mail Peter.Kugler@unibas.ch 525 Contemporary Economic Policy (ISSN 1074-3529) DOI: 10.1093/cep/byg030 Vol. 21, No. 4, October 2003, 525±538 # Western Economic Association International