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On the Optimality of Sealing Criminal Records, and How It Relates to Adverse Selection, Productivity Reduction, and Stigma

Criminal convictions result in expected losses due to stigmatization. The magnitude of these losses depend on, among other things, the convict's future expected earnings. People who face larger wage reductions due to convictions suffer more from stigmatization. Intuition suggests that this asymmetry may lead to over- and under-deterrence problems. This intuitive deduction ignores the possibility that indirect harms from crime may be related to a person's wage, and therefore the stigma attached to conviction. I show that if wage cuts reflect employers' effort to match the reduction in convicts' productivity caused by their criminal activity, they cannot cause over-deterrence. However, over-deterrence is observed if stigmatization is caused by simple adverse selection problems. These over-deterrence problems can be mitigated or eliminated by offering convicts a costly opportunity to seal their criminal records. I construct a law enforcement model that incorporates these insights, and use it to identify relationships between equilibrium crime rates, expungement rates, formal sanctions, and the average pay of occupations. I consider various legal reforms in light of my findings.