finders keepers forfeiture laws, policing incentives, and.pdfVIP

Journal of Public Economics 91 (2007) 2113 – 2136 /locate/econbase Finders keepers: Forfeiture laws, policing ☆ incentives, and local budgets Katherine Baicker a,b , Mireille Jacobson c,⁎ a UCLA, United States b NBER, United States c University of California, Irvine, School of Social Ecology I, Irvine, CA 92697-7075, United States Received 6 September 2006; received in revised form 23 March 2007; accepted 23 March 2007 Available online 31 March 2007 Abstract To encourage anti-drug policing, the federal government and many state governments have enacted laws that allow police agencies to keep a substantial fraction of the assets that they seize in drug arrests. We use rich new data on police seizures and local spending to explore the reactions of both governments and police to the incentives created by these policies. We find that local governments offset police seizures by reducing their other allocations to police, partially undermining the incentives laid out in statute and diverting the earmarked funds to other purposes. Police, in turn, respond to the real net incentives for seizures, once local offsets are taken into account, by increasing the drug arrest rate. Heroin prices also increase, suggesting that the increased emphasis on anti-drug policing raises the supply costs of illicit drugs. These findings highlight both the promise and pitfalls of using financial incentives to solve agency problems in a federal system: both local agents and intervening governments have sophisticated responses to financial incentives, a