In the first six months of 2003, branches of Commerce Bank in New York City were

Question

In the first six months of 2003, branches of Commerce Bank in New York City were robbed 14 times. The New York City Police recommended steps the bank could take to deter robberies, including the installation of plastic barriers called "bandit barriers." The police were surprised the bank did not take their advice. According to a deputy commisioner of police: "Commerce does very little of what we recommend. They've told our detectives they have no interest in ever putting in the barriers." Source: Dan Barn. "Friendly Bank Makes It Easy for Robbers." New York times, July 5,2003. It would seem that Commerce Bank has a strong incentive to install bandit barriers to deter robberies? Why: then, wouldn't they do it? The banks have little concern for the safety of their customers and employees. People respond to economic incentives. People are rational. Optimal decisions are made at the margin.

Explanation / Answer

D. Optimal decisions are made at the margin. The installation of the barriers will result in a definite charge,but the probability of the bank suffering another robbery is small.The expected losses may very well be smaller than the cost of thebarriers, since the previous robberies are seen as a kind of "sunkcost" to the bank. At the margin then, it seems that perhaps thebarriers are not worth it.

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