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Dissertation Proposal

Inequality Impact on Crime: The Role of Social Capital

Davy Hendri

NPM 1106126131

Postgraduate Progam in Economics

Economic Faculty

Indonesia University

Depok, 2014

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Contents

Chapter 1 Preliminary Page

1.1. Introduction 1

1.2. Inequality and Crime 4

1.2.1. Relative Deprivation 4

1.2.2. Rational Choice 6

1.3.

1.4

Social Capital

Mediating Role of Social Capital on Crime

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Chapter 2 Income Inequalities Impact on Crime:

Role of Bonding and Bridging Social Capital

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2.1. Introduction 13

2.2. Problem Formulation 14

2.3. Study Hyphothesis 14

2.4. Literature Review 15

2.5. Conceptual framework 18

2.6. Methodology 25

2.6.1. Variable and Data 25

Chapter 3 Residential Income Segregation Impact on Crime for Cities in Java :

Role of Neighborhood Effects

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3.1. Introduction 32

3.2. Problem Formulation 36

3.3. Study Hyphothesis 37

3.4. Literature Review 38

3.5. Conceptual framework 42

3.6. Methodology 49

3.6.1. Variable and Data 50

3.6.2. Empirical Strategy 53

Reference

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CHAPTER ONE

Preliminary

1.1. Introduction

Among the various facts improvement in Indonesia’s macroeconomic indicators after global

economic crisis in 1998, the pattern of income distribution deteriorated into a negative note.

The bad news is widening income inequality occurs in both quantity and quality terms. In

terms of quantity, Gini index as a proxy for income inequality, crawling slowly but surely

over the years. At the national level, in 2005 the gini index is merely 0.34, rose to 0.37 in

2009 and then became 0.41 in 2011 and 0.413 in 20131. Even, Gini index between 2002-2012

show quite spectacular magnitude of the increasing inequality, approximately 20 %, and the

ratio of each decile dispersion has increased by 50 %.

Meanwhile, in terms of quality, some studies have found a pattern of evolution of inequality

that increasingly alarming. Rising inequality is clearly visible throughout the regions, the

province and even in the entire urban-rural dimension. Inequality is usually a symptom

common in urban areas have migrated to the village. The bottom 40% income group in rural

areas decreased by 0.5 % each year. Interestingly, the data showed a trend of inequality

convergence across provinces due to changes in inequality occurred faster in provinces with

lower initial levels (Anshory, 2013).

Both records were counterproductive. Various theories were advanced by many experts from

various disciplines have explained the dangers (including cost) of higher gini index towards

the economic and social sectors2, even though the amount of Gini index numbers are

considered relatively high it is still a debate among economists. Some issues in the field of

health and social study, including the spread of crime is an example of the cost to the state

and society as a result of (heightened gini index) worsening income inequality (Soubbotina,

1 BPS, Key Indicators of Social Development-Economy of Indonesia, summarized from various years,

2 Joseph E. Stigliz, Columbia University economist and Nobel Prize in Economics in 2001 specifically to discuss

the issue and the impact is broad and deep inequality concerning polarization, the labor market, economic

insecurity and declining living standards and mempubikasikan in his book The price of Inequality, 2012 . Stigliz

also discusses the impact of inequality on the decline in the Trust, as an element of social capital at chapter 6

of the book.

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2004). The facts show that the crime rate is also increasingly rising over time. The number of

(reported) crimes3 in 2012, to be exact until November 2012, reaching 316500 cases. Risk

population who experience crime around 136 people this year. So, every 91 seconds a crime

occurred in Indonesia in 2012 (Detective Agency and Criminality of Police Headquarters,

2012).

This phenomenon has long been a concern of economists with various explanations given.

Economic studies found a positive relationship between income inequality and crime. Ehrlich

(1973) developed a model of rational choice to commit crime initiated by Becker (1968). The

decision to commit crime by individuals who are rational and free (independent) depends

only on the monetary payoff from the criminal activity is positively related to individual

earnings potential victims from higher income strata. Thus, ceteris paribus, if the revenue

potential victims becomes higher, more uneven income distribution, the greater the incentive

for a person to become a criminal. Bourguignon (1999) provides insight into the theoretical

model in which relative poverty and income inequality is a major determinant of criminal

activity in general.

3 The first indicator is the total crime is the total amount of incidence of crime (C) that occur and are reported

to or recorded by the police in one year. Meanwhile, the risk of population exposed to crime is the ratio

between the total incidence of crime per 100,000 population (C/population) * 100,000. Meanwhile the timing

of krimalitas a ratio of the number of seconds in a year to total incidence of crime (3600 * 365 * 24/C). More

details see Statistics of Crime, BPS.

Sumber : Data processed from Statitik Kriminalitas, BPS

Figure 1. National Crime rate and Gini Index 2005-2011

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But the facts on the ground also showed that regions with similar economic characteristics

also have different levels of criminality. There is also the era wherein crime declined

(ascending) even in areas with economic characteristics such as earlier with ascending trend

(decline)4. Meanwhile, other regions with different economic characteristics it has in

common crime. This conundrum prompted experts raises another alternative approach to

looking at the phenomenon of crime.

Analysis of the freedom based (independence) decision-making process by the individual

then alternate by the analysis of social and environmental influences in any decision-making

by individuals. In other words, the individual is deemed interplay (interdependence) looking

for the bset decision about something which then will affect him self. Individual decisions are

influenced by his/her neigborhood characteristics (neighborhood effect). Relationships

between the various aspects of the living environment and a variety of status and behavior of

children and adults in the neighborhood become a fundamental theory in a variety of

disciplines5.

This dissertation proposal tries a study of the impact of inequality on crime that encapsulates

two pieces of essay. The first essay, discuss the issue of housing inequality based on income

(residential income segregation) as a phenomenon of urbanization and its impact on crime.

This essay is a case study focusing on the cities in Java. Java as the center of the urbanization

and suburbanization already have urban pattern continuity are mega-size, large and small

cities. So, the types and function of the inner city and suburban provide opportunities for

exploration and diverse patterns of crime to be investigated.

Meanwhile the second essay discusses the phenomenon of income inequality of the type and

pattern of crime in the entire city/county in Indonesia. The second essay uses the same

mediating variables, namely social capital, which decomposed to bonding and bridging social 4 In the Indonesian context, the high crime rate (not total incidence of crime) are not always consistently

dominated by the region along with the proportions of high poverty inequality dn. In 2011, North Sulawesi

province was recorded as 13.18% poverty rate and the Gini index of 0.39 and crimerate rate (incidence of

crime in 100,000 population) in Indonesia is the highest, at 496. Comparing with Jakarta in the same year as

the level of poverty 13.80% and 0.44 and the gini index crimerate numbers only 260. Meanwhile, in Jakarta, in

2010 the poverty rate of 13.65% and a gini index of 0.36 turns crimerate number reached 297.

5 Sociologists and economic (urban economist) focused on the impact on behavior. Meanwhile epidemiologists

study focuses on the impact on health, both mental and psychic

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capital. Social capital explored to see whether acting as a damper status of various

phenomena of criminality in both essay. The main difference lies in the loci used. In the first

essay, focused on social capital at the community level (neighborhood) at meanwhile in the

second essay focused on individuals and households6.

1.2. Inequality and Crime

Inequality (income and assets in general) related to crimes for various reasons. At least there

are some theories linking income inequality and crime that can be grouped into major themes,

namely frustration. In this case income inequality affects crime involving frustration as a

mechanism of causality. Different approaches proposed by different sciences. The following

section will propose a theory proposed by sociologists and economists.

1.2.1. Relative deprivation

Runciman (1966) suggests that people compare themselves with some reference group

within society rather than with the whole society. The essence of this theory is that the impact

of deprivation resulting from not having X when others having it is an increasing function

of the number of persons in the reference group who have X. Runciman defines relative

deprivation as follows : we can roughly say that (a person) is relatively deprived of X when

(i) he does not have X, (ii) he sees some other or persons, which may include himself at some

previous or expected time, as having X (whether or not this is or will be in fact the case), (iii)

he wants X , (iv) he sees it as feasible that he should have X.

The range of possible deprivation for each person in the society is , where *y is the

highest income existing in the society. For each person i , his own income iy partitions the

possible deprivation into two segmens , the range of income for which he is deprived

and

6 Raudenbush & Sampson (1999) show that individual-level reliabilities are fundamentally different and often

very discrepant from, the aggregate-level reliability of a survey measure to detect between-neighborhood

differences. The main factors increasing the aggregate reliability of a measure are the number of respondents

within each neighborhood (with 25 a rule-of-thumb goal), the number of neighborhoods, and the proportion of

total variance between neighborhoods relative to the amount within neighborhoods. Similarly, observational

reliabilities depend on the number of ecological units assessed and the between-unit variance

*(0, )y

*

,( )iy y *(0, )y

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the range of income he is satisfied. According to this defenition, the degree of relative

deprivation of the range can be quantified by , where

is the cummulative income distribution and is the relative frequency of persons with

income above y.

There are two functional realtionships :

(1). is the relative deprivation function of person i

(2). is the relative satisfaction function of person i

Integrating (2) , we see that

where is average income and g ( )iy is the value of the Lorenzt curve.

Using (2) and (3) we can rewrite the relative deprivation function (1)

Where *( )S y , so

In aggregate where G is Gini index

In another subject, happiness level measurement based on comparison with others. The same

process do also in the judgement of their own success level (eg, Duesenberry, 1949;

Easterlin, 1974; Festinger, 1954, Firebaugh and Tach, 2004). As it’s consequence, some

people will be frustrated by the (more) uneven distribution of income. Blau and Blau (1982)

argued in their study of the relationship of inequality and violent crime : socioeconomic

disparities potentially damaging to the social integration of the community by creating

multiple parallel social differences that widen the separation between ethnic groups and

between groups and create a situation characterized by number of social disorganization and

,( )y y dy 1 ( )F y0

( ) ( )y

F y f z dz 1 ( )F y

*

( ) 1 ( )

i

y

i

y

D y F z dz

0

( ) 1 ( )iy

iS y F z dz

( ) 1 ( ) ( )..........(3)i i i iS y y F y y

*

*

*

0 0( ) 1 ( ) 1 ( ) 1 ( ) ( ) ( )

i

i

yy y

i i

y

D y F z dz F z dz F z dz S y S y

( ) ( ).................(4)i iD y S y

*

0

( ) ( ) (1 )............(5)

y

S S z f z dz G

*

0

( ) ( ) ...................(6)

y

D D z f z dz G

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latent hostility. Inequalities in resources implies that there is abundance of wealth in the view

that cannot reach by many people who are doomed to live in poverty.

1.2.2. Rational Choice

The economists, led by Gary S Becker (1968) with a model of rational criminal activity that

is then developed by Erlich (1975) essentially argues that an individual's decision whether to

be or not be a criminal based on benefit-cost analysis. If an individual calculate the

probability if he does not get caught with a profit obtained from the potential victim exceeds

the probability of losing his income from the legal work plus the excess of the cost of work

done as well as penalties to be paid if he is caught, then he would decided to commit crime.

Explicitly, the decision did a crime by an individual, based on the target level of consumption

of each individual aspired to accomplish.

If a person cannot achieve the desired level of consumption through legal channels, he may

be able to do so by engaging in criminal activity. Tendency to become criminals increases

due to wider the difference between the target level and actual consumption. The increasing

income of the rich relative to the income of the poor would make income distribution more

uneven and increased crime rates. Implicitly, this theory states the areas with a large

proportion of poverty and it goes over time with increasing inequality is criminality enclave.

Rational choice theory stated that the decision of an individual to commit crime based on

several assumptions underlying the choice of an individual to commit a crime are :

1. Individuals are assumed to allocate the time available only for two types of activities

(working), namely the legal then gain legal l weatlh lw and illegal i (crimes) then gain

illegal weatlh iw .

Where time alocated or or

2. Individuals then maximize utility by competing the two types of activities earlier. So

people choose to do evil or not be based on the analysis of profit and loss (cost-benefit

( ) ( )........(8)b b l l i i i iU U g U t w t w f t

( ) ( . . )........(7)a a l l i iU U g U t w t w

i lt t t i lt t t l it t t

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analysis in monetary units). If someone committed a crime then he could be caught with

probability r and could not be caught with probability (1-r). So the expected utility of

crime

In order to maximize utility subject to contraint of working time or optimal allocation of

between two bundle of activities ( , )a bX X in interior solution must satisfies FOC :

( )(1 ) '( )( )....(11)b

b l i i

dU gr U g w w f

dt

(1 ) '( )( ) '( )( ) 0.....(12)ab a b a l i b l i iMRS dU dU r U g w w rU g w w f

(1 ).....(13)i i l

ab

i l

w f wrMRS

r w w

Where . From equation (12) the RHS refers to

slope of opportunity boundary (wealth constraint) concave to the origin and LHS refers to

slope of indifference curve convex to the origin.

*

it

*

lt

In equilibrium position, as risk preference " 0U

so

* *

i ii i

i i

dt dtr f

dr df

Figure 2. Indifference Curve of working time allocation between

Illegal and legal activities

A

B

iW

lW

i iW F

Indifference Curve

Opportuniy Boundary

Certainty Line

,b iX t

,a lX t

(1 ) ( . . ) ( )........(9)c l l i i l l i i i iEU r U t w t w rU t w t w f t

( )(1 ) '( )( )............(10)a

a l i

dU gr U g w w

dt

( ) ( ); ;a b

i l i

i l i

d g d g dFw w f

dt dt dt

10

(1 )( ) / r( ) 1.....(14)i l i i lr w w w f w

A partial increase in iw is then expected to increase both the fraction of working time

devoted to i as well as its absolute level, due to a complementary on wealth effect on

working time. In contrast, a partial increase in lw would like to a decrease in absolute

level of participation in i only if the resulting substitution effect within the market sector

exceeds on opposite an wealth effect on working time.

3. Risk-neutral individuals will rationally decide to commit a crime if the net benefit from

commit to crime :

(1 )( ) ( ) 0............(16)i i l i i lnb r w w r w f w

Assume in aggregate in community level, ;i i l lw Y w Y

So, equation (10) become

(1 )( ) ( ) 0................(17)i i l i i lnb r Y Y r Y F Y

Otherwise

1 1

1

2

N N

i l i l

i j

Gini Y Y n ny

where 0l

dGinid Y

So, it’s net benefit from commit to crime through an increase either on lY or gini

coeficient, can be obtained via the chain rule decomposition become :

Furthermore, some researchers are exploring cross-country comparisons to determine the

impact of income inequality. This measurement is based on research showing that social

tensions in groups can lead to violence and criminality. They concluded that the gini

coefficient and income polarization has a strong positive effect on increasing crime rates.

However, the polarization of the entire quintile, i.e, the ratio of the income of the richest to

the poorest quintile, did not produce a significant effect. These results provide evidence that

( ) (1 ) ( ) ........(15)i i i i lE w r w r w f w

. . 0......................(18)i i

l l

nb nb dGini

d Y Gini d Y

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inequalities in quintiles, not just among them (inter-quintile), may be an important factor in

encouraging criminal activity.

1.3. Social Capital

In economic, social capital can be defined in line with other forms of capital, according to

conventional term, such as both physical and human capital (Lin, 1999). All forms of capital

investment involves increasing the possibility of higher returns from the individual and

collective efforts during the next period (Ahn and Ostrom, 2002). Social capital associated

with investment in social relations with expected returns in other words, individuals who

engage themselves in the interaction and networking to generate a profit. According to Lin

(1999), action to build a social network with individuals in the four explanations can be

understood as follows : (1) facilitating the flow of information, (2) an agent that plays

important decisions (eg, hiring or promotion) can utilize the influence involving other agents

who have social ties with him, (3) allows individuals to access resources in their social

networks in shaping social relationships that build trust and (4) social relations are expected

to strengthen the identity and recognition.

Social capital has both an individual and collective aspects. In addition to his own advantage,

social capital can also have externalities that affect the wider community, so that not all of the

costs and benefits of social relationships payable to the person making contact. An individual

who has a good character attachment, may not produce social capital if it is in a society that

does not have a good attachment to each other. And even an individuals with bad character

attachment who might gain some spillover benefits from living in a society that is bound

either. If the crime rate in my neighborhood decreased by my neighbor activity overseeing

the other house, I get the benefit even if I personally spend most of my time on the road

(Putnam, 2000). As a concept that is still evolving, social capital has many features. Ahn and

Ostrom (2002) suggests three basic forms of social capital : trust, networks and institutions.

These three forms of social capital will enhance the trust between people.

Trust is a certain level of subjective probability with which an agent assesses that another

agent or group of agents will perform a particular action (Gambetta 2000) or simply the

expectation of the beliefs of others. In this case, the trust involves the risk of loss if the trustee

does not perform reciprocating action (Ostrom and Ahn, 2003). It also involves the

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opportunity to gain the benefit of both the trustor and trustee (Ostrom and Ahn, 2007). Trust

lubricates cooperation and reduce transaction costs between people as well as the cost of

monitoring. There are two types of trust ; confidence we have toward people we know and

trust we have towards those we do not know, but it appears because our belief in the social

structure is known (generalized trust) (Pretty & Ward, 2001).

Meanwhile, Nan Lin (2000) ascertains the fact that different people may not obtain uniform

social capital and obtain the return of social capital as they had hoped. If he came from

disadvantaged groups, low social economic status, then joined to form the same network,

then the network itself will result in a low level of social capital as well (poorer social

capital). Those fact refers to the deficit of social capital concept. In this case the deficit of

social capital refers to a process in which there is a difference between a certain group social

capital investment compared with other groups such as the distinction between the

educational level of men and women. While the deficit of social capital return refers to a

process in which there is a difference both in quantity and quality level of of social capital,

there are difference certain benefits perceived by different invidual, such as the distinction in

position and status between male and female employee.

1.4. Mediating Role of Social Capital

Inequality on all of its different aspects (income, education, occupation and residential

segregation) is often synonymous with social and economic isolation. In the context of

inequality of residential (housing segregation), its appereance particularly within urban

communities, as discussed in William Julius Wilson’s book The Truly Disadvantaged (1987).

One approach for ameliorating the negative consequences of social isolation is to alter

residents’ social ties through poverty deconcentration policy (Kleit & Carnegie, 2011).

Deconcentrating poverty may lead to enhanced economic outcomes as well as an improved

social and cultural milieu (Wilson, 1987'). Therefore, by living in more integrated areas

blacks might experience an increase in happiness due to their access to more diverse and

beneficial ties and opportunities.

On the other hand, there are classic studies citing the benefits associated with segregated

communities due to the presence of social cohesion in these communities (e.g., Stack, 1974;

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Gans, 1962). Scholars also note the potential for increased political power among segregated

minorities (Laveist, 1992; Bledsoe et al., 1995). This work is broadly supportive of the more

recent finding that blacks in general may value social capital more than whites: Lee and

Campbell (1999) find that blacks tend to interact with neighbors with greater regularity than

whites. Moreover, there is evidence that racially and ethnically diverse neighborhoods are

associated with reductions in social capital in U.S. neighborhoods (Putnam, 2007). Putnam

contends that this could be due to the misconception that social bridges—or connecting with

people from different groups—is similar to social bonds—or connecting with those in our

own group. Even more provocative, he finds that residents in diverse neighborhoods

experience declines in trust toward their own group members.

In the delinquent behavior outcome context, Glaeser (1995) termed the presence of positive

covariance (interdepedence) between individuals and his neighborhood to commit crime

decision. According to Bursik and Grasmick (1993), this argument is based on the Porte

taxonomy on three functions of social capital : (i) as a source of social control, (ii) as a source

of family support, (iii) as the source of the benefits of social networks (Portes, 1998). Social

disorganization theory assumes that crime is the result of weak informal social control. Of the

various theories put forward, social capital can affect crime through at least three ways.

First, in a society that is not regulated then people do not want to give informal monitoring.

Therefore, in contrast to the community with higher social capital level, will give better social

control so that the crime level lower. If control of this pervasive social problem officially, the

effectiveness of law enforcement and public control is higher in communities with extensive

public involvement. Moreover control is understood as " individual self-control " in the sense

that individuals combine utility resulting from attachment and social obligations that will be

his decision.

Second, families and people from low socioeconomic status invest less in their social

community. This can cause irregular communities with informal social control is weak in

which individuals are less involved in the community and did not want to intervene in

criminal cases. This is exacerbated by the effects of the mechanisms of learning, imitation

and take peers as role models (Manski, 2000).

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Third, people with strong attachment between people more able to deal with the threat of

crime. This is due to the exchange of information regarding the malignant behavior between

residents and neighbors can facilitate responsive action to prevent the possibility of criminal

behavior in the first place (Sampson, Morenoff and Earls, 1999). In this community conflict

resolution costs decreased or resolved the conflict by peaceful means because of strong

attachment and involvement in community affairs. In addition to offering an explanation for

the different criminal tendencies across individuals, social capital accumulation models

outlined.