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ABSTRACTWe model the decisions of young individuals to stay in school or drop out and engage in criminal activities. We build on the literature on human capital and crime engagement and use the framework of Banerjee (1993) that assumes that the information needed to engage in crime arrives in the form of a rumour and that individuals update their beliefs about the profitability of crime relative to education. These assumptions allow us to study the effect of social interactions on crime. In our model, we investigate informational spillovers from the actions of talented students to less talented students. We show that policies that decrease the cost of education for talented students may increase the vulnerability of less talented students to crime. The effect is exacerbated when students do not fully understand the underlying learning dynamics.

We estimate the effects of reforms on railroad efficiency in Europe by using a new panel data set that covers most EU countries over a period of more than 20 years. A production frontier model finds that efficiency increases when reforms such as third‐party network access, introduction of an independent regulator, and vertical separation are implemented. However, the reform effects depend on sequencing: introduction of multiple reforms in a package has negative effects, while sequential reforms improve efficiency. We also show that our results are robust against potential problems of endogeneity.