Pii: S0144-8188(00)00039-9

In the standard economic theory of crime and punishment, a risk-neutral individual will commit an offense if and only if his private benefit exceeds the expected sanction for doing so. To the extent that several individuals simultaneously choose whether or not to commit the offense, it is assumed that their decisions are independent of each other. The purpose of this paper is to investigate a situation in which an individual’s propensity to engage in an illegal activity may depend also on the behavior of other individuals. We consider a two-period model: In each period, individuals decide simultaneously whether to commit the offense. A police authority is in charge for the arrest and conviction of offenders. We assume that the police authority has a limited enforcement budget such that it cannot arrest and convict every offender. In this situation, the expected payoff of an individual from committing the offense is higher the more individuals also decide to behave illegally. We analyse the interactive behavior in this model and answer the following questions: When are individuals responding to others’ behavior, when are they influencing others’ behavior. And, what is the optimal enforcement policy to forestall interactive behavior. © 2001 Elsevier Science Inc. All rights reserved.