Steve Levitt is known for the clever use of data to test hypothesis, for present purposes, of the deterrent effect of prison.
The econometrics of deterrence are complicated by the fact that increases in the number of prisoners are likely to reduce crime, but rising crime rates also translate into larger prison populations. Which came first?
Levitt found a clever way of testing whether the imprisonment had a deterrent effect by looking at what happened after successful litigation against overcrowded prisons.
When prisons became less crowded, were more people willing to risk prison because it was a less unpleasant experience?
Overcrowding litigation reduces the number of people in prison, but this change in the size of the prison population is unlikely to be related to fluctuations in the crime rate.
These lawsuits affect prison populations, but may be otherwise unrelated to crime rates especially because they take a decade or more to resolve. The prison population is falling because of the successful litigation and nothing else.
In 13 states, lawsuits affected a state’s entire prison system. In the three years after a final judgement was handed down, prison populations fell by 14.3% compared to the population of the nation as a whole; violent and property crime rates increased 10.2% and 5.5% respectively.
Levitt found that the responsiveness of crime to prison populations was two to three times greater than previous studies:
For each one-prisoner reduction induced by prison overcrowding litigation, the total number of crimes committed increases by approximately 15 per year.
The social benefit from eliminating those 15 crimes is approximately $45,000; the annual per prisoner costs of incarceration are roughly $30,000.
In another study, Levitt found the quality of life in prison has a greater impact on crime than the death penalty. He showed the death rate among prisoners (the best proxy for prison conditions) is negatively correlated with crime rates, consistent with deterrence. Criminals do not like to be sent to unpleasant, dangerous prisons.
Utopia, you are standing in it! 
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