"Rehabilitation for ex-offenders has positive (e.g. more production) and negative (e.g. more crime) effects on society. We investigate the effect of rehabilitation on criminal behavior and the labor market using a search model. In the case where ex-offenders cannot join the labor market, promoting rehabilitation for them may reduce crime. In such a case, the equilibrium allocation may be inefficient. Moreover, under the Hosios condition, equilibrium labor market tightness is lower than the efficient outcome because of crime, as the crime option raises the value of unemployed workers. Because this option works as a negative externality on matched firms, equilibrium tightness is lower than the optimal level."

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