Thursday, June 30, 2016

Anti-Crime Laws and Retail Prices

One sentence summary: The anti-panhandling ordinance has resulted in lower gasoline prices in the County of Sacramento.

The corresponding paper by Hakan Yilmazkuday has been accepted for publication at Review of Law and Economics.

The working paper version is available here.
The fear of becoming a victim of crime acts like barriers to retail trade for consumers, where retailers attempt to reduce such barriers by enduring additional costs such as insurance or security/surveillance costs; as a result, retail prices are affected by the possibility of crime. This paper attempts to measure such effects by considering the recent experience of the County of Sacramento, where an anti-panhandling ordinance has been issued to protect the retailers. As an application, a difference-in-difference approach is employed to identify the effects of the ordinance on Sacramento gasoline prices at the retail level, by considering the gasoline prices in neighbor counties as the control group of a natural experiment. The results show that the anti-panhandling ordinance has resulted in lower gasoline prices in the County of Sacramento.

Non-technical Summary
The fear of victimization imposes indirect costs to society through its negative impact on local business establishments, especially retailers that make a neighborhood a convenient and stable place to live and shop. It has been shown that individuals perceive crime as highly visible signs of disorderly and disreputable behavior in the community, which affect a community's social and economic vitality. Therefore, crime is perceived as one of the most serious urban problems where high-crime neighborhoods discourage individuals from living, shopping, conducting business or seeking entertainment. Although the fear of victimization has shown to contribute to neighborhood decline and deterioration, policy makers have given more importance to residential crime, fear of crime, and various disorders such as homelessness, prostitution, and abandoned buildings. However, the same attention has not been provided for the neighborhood businesses until recently. Realizing this lack of attention, given the social and economic effects of crime on the local business establishments, many jurisdictions have started special programs to prevent crime in the last two decades, including a recent case by The County of Sacramento in 2015 to prohibit aggressive panhandling.
In the U.S., the Supreme Court has held that panhandling/begging is a form of speech that is protected by the Constitution, but political divisions have successfully outlawed "aggressive" forms of panhandling. Therefore, aggressive panhandling has been started being defined as a crime in certain neighborhoods. The County of Sacramento is one of these divisions that has recently passed an ordinance prohibiting panhandling that has become effective on January 14th, 2015 as announced by the Sacramento County Sheriff's Department. In particular, the ordinance prohibits soliciting for cash in "an aggressive or intrusive manner in any public place," including within 35 feet from an automated teller machine (ATM), within 200 feet of a vehicle at an intersection, within any vehicle stopped at a gas station, on any traffic median strip and on buses and city 
This paper investigates the short-run effects of this ordinance on the equilibrium gasoline retail price in Sacramento County by using data at the station level. Since the equilibrium price depends on both demand and supply conditions, the effects of the ordinance may be either through (i) the consumer side where customers may stop shying away from gas stations due to the fear of meeting aggressive panhandlers, or (ii) the producer side where gas stations may stop facing additional costs (because of aggressive panhandlers) such as insurance premiums to cover losses, security/surveillance costs, lower profits due to shorter operating hours, replacing and repairing property, or higher labor costs in order to compensate employees for higher risks of working. Within this context, the ordinance would result in a higher demand when customers stop shying away from gas stations, and it would result in a higher supply when gas stations face fewer costs. Accordingly, the effects of the ordinance on the equilibrium gasoline price depends on the relative magnitude of such changes/shifts in demand and supply conditions as well as their corresponding initial positions (i.e., the price elasticities of demand and supply). In other words, the theory is silent, and we need an empirical investigation in order to figure out such effects.

In terms of the methodology, we achieve our investigation by using a difference-in-difference approach where the gas stations located in the County of Sacramento experiencing the policy change on January 14th, 2015 are analyzed as the treatment group of a natural policy experiment, and the control group consists of gas stations in the neighbor counties with no policy changes. Since the ordinance restricting panhandling near gas stations is due to the Sacramento County law (rather than market conditions), using a difference-in-difference approach is a compelling way to study the effects of the ordinance on retail prices, and it is robust to any identification/endogeneity problem.

The benchmark results show that the gasoline prices have decreased in Sacramento County right after panhandling is prohibited compared to the neighbor counties. These short-run results are robust to the consideration of daily and hourly price changes that are common across all gas stations in the sample. Since the equilibrium retail prices may also depend on retail characteristics such as the brand of the gas station, having a car wash or a convenience store, or the exact location of the gas station within the neighborhood, the benchmark investigation also considers brand fixed effects or station fixed effects. Therefore, there is strong evidence for lower gasoline prices right after the ordinance. It is implied that the changes in supply conditions have been more effective than the changes in demand conditions in the determination of equilibrium gasoline prices. These benchmark results are further supported by longer-term before-and-after analyses, and robustness tests considering outliers or gas stations that are closer to the county border, which all suggest lower gasoline prices in Sacramento County after the ordinance.
More details can be found in the working paper version that is available here.

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