Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack

Abstract

Private expenditures on crime reduction have potentially important externalities. Observable measures such as barbed-wire fences and deadbolt locks may shift crime to those who are unprotected, imposing a negative externality. Unobservable actions, on the other hand, provide positive externalities since criminals cannot determine a priori who is protected. Focusing on one specific form of victim precaution, Lojack, we provide the first thorough empirical analysis of the magnitude of such externalities. Because vehicles equipped with Lojack are not identifiable to criminals, any decrease in crime rates associated with Lojack is an externality from the perspective of the Lojack purchaser. We find that Lojack has large crime-reducing effects. Each one-percentage point increase in the Lojack installation rate in a market is associated with a 20 percent decline in auto theft rates in large cities and a 5 percent decline in the rest of the state. Rates of other crimes do not change appreciably. Our estimates suggest that the marginal social benefit of an additional unit of Lojack is 15 times greater than the marginal social cost. Those who install Lojack in their cars, however, obtain less than ten percent of the total social benefits of Lojack, causing Lojack to be dramatically undersupplied by the free market. Current insurance subsidies for the installation of Lojack appear to be well below the socially optimal level.

JEL Classification: K42, H23