"...the direct benefit to the Lojack owner/insurer represents less than 10 percent of the overall social benefits of installing Lojack, since almost all of the benefits are the result of reduced auto theft in the area."
Crime reduction devices that can be seen, including barbed-wire fences and deadbolt locks, may shift crime to those who don't have them. Unobservable precautions on the other hand, like the Lojack car retrieval system, may prevent crime for all in the vicinity. With Lojack, a small radio transmitter is hidden in one of many possible locations within a car. When the car is reported stolen, the police remotely activate the transmitter, allowing specially equipped police cars and helicopters to track the precise location and movement of the stolen vehicle. Of stolen vehicles equipped with Lojack, 95 percent are recovered, compared to roughly 60 percent of stolen vehicles overall. The average loss per auto theft is estimated to be $1000 for cars with Lojack versus roughly $4000 for cars without it.
Lojack was first introduced in Massachusetts in 1986; it was subsequently introduced to South Florida in 1988 and to three additional markets in 1990. As of December 1994, Lojack served 12 markets. Of course, installing Lojack does not reduce the likelihood that YOUR car will be stolen. But a recent NBER study by Ian Ayres and Steven Levitt finds that the presence of Lojack is associated with a sharp fall in overall auto theft in central cities and a more modest decline in the remainder of the state. For example, Boston experienced a 50 percent decline in auto theft rates since the introduction of Lojack; Newark's rate fell 35 percent, and that of Los Angeles/Long Beach by almost 20 percent.
In "Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack" (NBER Working Paper No. 5928), Ayres and Levitt find that one auto theft is eliminated annually for every three Lojacks installed in central cities. And, the arrest rate for stolen vehicles equipped with Lojack is three times greater than for cars without it. Further, Lojack disrupts the operation of "chop-shops" where stolen vehicles are dissembled for resale of parts. In Los Angeles alone, Lojack has resulted in the breakup of 53 chop shops, the authors note. Rates of other crimes do not change appreciably with the presence of Lojack.
Their calculations suggest that an individual automobile owner in a high crime area who does not have theft insurance will benefit from installing Lojack because of the increased recovery rate and the lessened damage to Lojack-equipped stolen vehicles. For those with theft insurance, the benefit is much smaller, since most of the costs associated with theft are borne by the insurer. In either case, the authors estimate, the direct benefit to the Lojack owner/insurer represents less than 10 percent of the overall social benefits of installing Lojack, since almost all of the benefits are the result of reduced auto theft in the area. All car owners, regardless of whether they have Lojack, reap the benefits of reduced auto theft. Consequently, Lojack is likely to be dramatically undersupplied by the free market. Although some insurance companies provide premium discounts for Lojack-equipped vehicles, the amounts are well below the level required to obtain the socially optimal level of Lojack installation.