This paper presents a dynamic model of criminal activity. Individuals are endowed with legal and criminal human capital. Potential incomes in legal and criminal sectors depend on the level of the relevant human capital, the rate of return and random shocks. Human capital can be enhanced by participating in both sectors. Legal human capital can also be enhanced through investment. Human capital is subject to depreciation. Individuals maximize expected discounted lifetime utility, which depends on consumption. The model allows analyses of the effects of recessions, imprisonment/rehabilitation scenarios, sanctions and returns to human capital. New insights, such as hysteresis in criminal behaviour, are obtained.
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