Studies in the economics of crime literature have reached mixed conclusions on the deterrence hypothesis. One explanation which has been offered for the failure to find evidence of a deterrent effect in the long run is the natural rate of crime. This paper applies the univariate Lagrange Multiplier (LM) unit root test with one and two structural breaks to crime series for the United Kingdom and United States and the panel LM unit root test with and without a structural break to crime rates for a panel of G7 countries to examine whether there is a natural rate of crime. Our main finding is that when we allow for two structural breaks in the LM unit root test and a structural break in the panel data unit root test, there is strong evidence of a natural rate of crime. The policy implications of our findings is that governments should focus on altering the economic and social structural profile which determines crime in the long run rather than increasing expenditure on law enforcement which will at best reduce crime rates in the short run.
Natural rate of crime; Deterrence hypothesis; unit root.
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