The incarceration rate has increased substantially in the United States between the 1980s and the 2000s. In this paper, I explore an institutional explanation for this growth: the fact that costs of incarceration are not fully internalized. Typically, prison is paid for at the state level, but county employees (such as judges, prosecutors or probation officers) determine time spent in custody. I exploit a natural experiment that shifted the cost burden of juvenile incarceration from state to counties, keeping overall costs and responsibilities unchanged. This resulted in a stark drop in incarceration, and no increase in arrests, suggesting an over-use of prison when costs are not internalized. The large magnitude of the change suggests that misaligned incentives in criminal justice may be a significant contributor to the current levels of incarceration in the United States.
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