Research Highlights Article
May 22, 2026
The effect of prison sentences on financial crime
Evidence from Finland suggests that incarceration for fraud defendants reduces recidivism and discourages misconduct among defendants’ colleagues.
Source: StudioRomantic
The scale of fraud has surged worldwide over the past decade. Yet, despite mounting costs to victim households and firms, financial crimes are often punished less harshly than other nonviolent offenses. In Finland, for instance, only 11 percent of financial crime defendants are sentenced to prison, compared with 22 percent for drug crimes and 36 percent for property crimes.
In a paper in the American Economic Journal: Economic Policy, authors Kristiina Huttunen, Martti Kaila, David C. Macdonald, and Emily Nix explore the effects of sentencing on financial crimes in the context of Finland.
The researchers suspected that financial crime defendants, who tend to be older, more educated, and more likely to be employed than other nonviolent offenders, might respond differently to incarceration than the broader populations typically studied. Almost half of financial crime defendants reoffend within five years, making the question of whether punishment reduces future crime a major policy concern.
To address this question, the authors used population-level administrative data from Finland covering all district court cases between 2000 and 2018, which they linked to detailed labor market records, workplace identifiers, and judge information collected from the National Court Registrar. After they imposed sample restrictions to ensure clean random assignment, their sample contained 44,611 financial crime defendants tried by 752 unique judges across 64 courts.
Financial crime on the rise
The chart below shows the proportion of financial, property, and violent crime in Finland between 1992 and 2018. (Since traffic crimes are excluded, the shares do not add to 1.) The share of all crimes consisting of financial crimes has grown from just under 12 percent to over 14 percent.
The central challenge was isolating the causal effect of imprisonment from selection effects. Defendants sentenced to prison are systematically different from those who receive fines or probation, with more extensive criminal histories and higher underlying recidivism risk. The authors addressed this issue by exploiting the fact that Finnish law requires cases to be randomly assigned to judges, and judges differ substantially in their sentencing tendencies.
"Individuals who get a harsh judge are, on average, the same as the individuals who get a lenient judge," Macdonald said. "This is just what randomization does."
A naive comparison between criminals who were sentenced to jail and those who weren’t suggested that prison sentences increased reoffending by roughly 40 percentage points. But after the researchers used random judge assignment to isolate causal effects, the result reversed. A prison sentence reduced the probability that a financial crime defendant was charged with another offense within three years by 43 percentage points.
Because the average sentence served by the affected defendants was only 142 days, and reoffending effects emerged only two years after sentencing, incapacitation was an unlikely explanation. The authors point instead to a combination of deterrence effects and rehabilitation.
The paper also documents a previously unmeasured spillover effect. For fraud cases, a prison sentence reduced the probability of workplace colleagues committing financial crimes within three years by 27 percentage points. This finding suggests that harsher punishments deter not only the punished individual but also those who observe the punishment.
Finally, the researchers used police administrative data to challenge the idea that financial crimes are victimless. Through a matched difference-in-differences analysis, they found that victims experienced a 5.3 percent relative decline in earnings in the year following the crime, along with a small relative decline in employment.
Prison is certainly not the only tool, and there may be other good tools as well, but it is a tool that could reduce financial crimes.
David Macdonald
The authors emphasize that their estimates apply to defendants on the margin of incarceration—those for whom judges may disagree on sentencing—not to the most or least serious offenders. Furthermore, the Finnish context features prisons explicitly oriented toward rehabilitation, which may not generalize elsewhere.
"These results are true in Finland, but they may not hold for the United States or other jurisdictions," Macdonald cautioned, noting that correctional institutions vary substantially across countries and even across US states. He added that prison "is certainly not the only tool, and there may be other good tools as well, but it is a tool that could reduce financial crimes."
The research fills an important gap in the empirical literature on white-collar crime and helps to inform policymakers weighing the potential reduction in these crimes against the costs of prison sentences and the impacts of alternative policies.
♦
“Punishing Financial Crimes: The Impact of Prison Sentences on Defendants and Their Colleagues” appears in the May 2026 issue of the American Economic Journal: Economic Policy.