Abstract
This paper develops a simple model to examine the economic consequences of two different criminal market structures in the private protection and extortion industry: (1) horizontal (decentralized) governance and market structure and (2) hierarchical (centralized) governance and market structure with a criminal organization. Forming a criminal organization produces positive or negative effects on its members and social efficiency. These results depend on the potential competitiveness among criminals and the ability of a criminal organization’s boss to target more valuable extortion victims.
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According to Leeson and Skarbek (2010), criminal constitutions promote the cooperative behavior of members in the organization and regulate behavior that is costly to the organization, such as unnecessary use of violence.
Usually, the boss of a criminal organization behaves as a rent-seeker. This setting is similar to studies of the Mafia and the state using the conflict approach, as in Grossman (1995) and Skaperdas and Syropoulos (1995). Additionally, one notable example is that of a monetary transfer or a royalty payment from lower to upper ranks within the Japanese Mafia known as “jonokin” (Hill 2003). Such a monetary payment becomes a burden on lower-ranked organizational members.
Most previous papers do not use a formal setting by focusing on specific examples: prison and youth gangs, eighteenth-century pirates, and the Sicilian Mafia. These papers focus on the exogenous shock of the demand in the lemon market (Dimico et al. 2017), the alternative provider of protection (Sobel and Osoba 2009), and the internal institution mechanisms to prevent extreme predation (Leeson 2007; Skarbek 2008) and norms (Skarbek 2012) within the organization as characteristic features of criminal organizations. Thus, except for Leeson and Rogers (2012) and Leeson and Skarbek (2010), the abovementioned papers do not explicitly discuss the relationship between coordinated organizational benefits among criminals and its monopolized governance form.
Although Bandiera (2003) explicitly discusses the economic implications of the emergence of the Sicilian Mafia with a formal setting, the main role of the Mafia is different from ours. In Bandiera (2003), the Mafia is modeled as a pure provider of private protection to multiple landowners. Thus, the Mafia as a coordination benefit provider is not incorporated.
According to Gambetta (1993), Varese (2011), and Lavezzi (2008), the monopolistic Mafia can produce privileged protective profits for firms by eliminating competition and enforcing an implicit cartel among such firms in numerous industries, which is a difficult task for independent individual criminals. Additionally, see Buonanno et al. (2016) for political connections with Mafias in political elections. Mafias create benefits by providing voting shares for some politicians. As an example of a Japanese Mafia, Hill (2003) noted interactions among the Mafia, the construction industry, and famous politicians.
We implicitly assume that one representative criminal demands the tribute. Thus, in this case, we do not consider the strategic situation among criminals.
Konrad and Skaperdas (1998) consider the possibility that \(v^{C}\) can be a random variable. In this case, an incentive for investments can be different from that in the case of fixed \(v^{C}\). However, this scenario does not reduce the competitive pressures among criminals; hence, this paper does not consider this random variable scenario because our main motivation is to examine how organizational structures impact the criminal market.
In this case, the expected payoff of the victim is identical for these two choices; thus, we assume that the victim always pays a tribute.
Hereafter, we assume that the victim has the same objective function as the government. That is, the victim must bear the investment costs.
These outcomes also satisfy the second-order conditions.
Following previous studies of a monopolistic criminal organization by Schelling (1971), Buchanan (1973) and Garoupa (2000), once the Mafia establishes a monopoly in its territory, lower-ranked criminals are organized by a boss and cannot engage solely in extortion. Additionally, for a while, we assume that potential criminals cannot choose whether or not to join the organization. Then, we implicitly assume that potential criminals join the Mafia as long as other options, such as working for a legal firm, are less attractive to them. In other words, criminals are passive to the Mafia’s entrance into the criminal market and a change in governance structure. Because many factors interact with each other (Skaperdas 2001; Varese 2011), lower criminals’ demand for a strong Mafia is not the only reason for the emergence of the Mafia. Of course, because improving the welfare of an organization’s members is a convincing reason for the centralization, we subsequently discuss the condition for the emergence of a centralized organization. Lastly, we consider the long-run equilibrium to investigate how the incentive of criminals regarding whether or not to enter the criminal market changes depending on market structures and governance forms.
To reflect such transactions within Mafia organizations, we consider the described manner of compensating a boss. However, if the manner that a boss is compensated is modified such that a boss receives a share of extortion gains after the conflict, this paper’s results provide the same implications.
This formulation is similar to that of Epstein and Mealem (2012) in that organized groups act as a unitary actor. Hence, by introducing an extractive relation within the organization, this paper tries to apply it to an illegal market.
The second-order conditions are also satisfied.
Nitzan (1991) terms the resources wasted in conflicts as rent dissipation. The researcher also assumes that wasted resources in conflicts are non-productive.
If a boss acts benevolently and demands no private gain with \(\sigma =1\), each criminal’s benefit is \(v^{M}/4n\) according to Lemma 2. Thus, it always holds that \(v^{M}/4n > v^{C}/(n+1)^2 =\pi _i^C\). That is, lower-ranked organizational members face a trade-off between coordinated benefit and an oppressive relation with a hierarchical boss, in which competitive pressures are insufficient to cover the cost of the rent-extractive relations within organizations. Such an oppressive relation between rulers and lower-ranked members of certain governance structures has already been discussed in the political science literature (Olson 1993). Olson discusses this effect on political institutions without a formal setting. Thus, this paper expands this discussion to the setting of a criminal market using a formal and theoretical model.
As we explained for the game setting in Sect. 2, a boss chooses his share before a conflict. However, if a boss chooses the share after a conflict, the value \(\sigma \) that represents his share acts as a parameter. In this modified scenario, as long as \(\sigma \) is small because of the extractive behavior of a boss, our implications will be unchanged. This is because, as in Lemma 2, if \(\sigma \) is sufficiently small, \(\pi _i^M\) and \(D^M =\sigma A+B\) tend to be small and \(\pi _k^M\) is large. Thus, the presence of the Mafia contributes to a reduction in the loss of social welfare and the welfare of organization members.
When these exist, some competitiveness among criminals both in social efficiency and improvement of an organization’s members can be achieved. This situation corresponds to the early emergence of the Sicily Mafia, as in Leeson and Rogers (2012).
When \(v^{M}=v^{C}\), we always have \(D^{M}<D^{C}\) according to Proposition 1.
We assume that \(\sqrt{v'}>4\), which implies that extortion gains are large enough to retain some participants.
Although the existing literature primarily focuses on the consumption of illegal goods, this paper considers the extent of illegal activities such as the use of violence. Thus, this paper has a different setting and motivation in that we stress the effect of organizing violence and criminal activities in an illegal market.
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Acknowledgements
I would like to thank the editor in chief Alain Marciano, two anonymous referees and Koichi Suga for their helpful comments and suggestions.
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Yahagi, K. Welfare effects of forming a criminal organization. Eur J Law Econ 46, 359–375 (2018). https://doi.org/10.1007/s10657-018-9600-0
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DOI: https://doi.org/10.1007/s10657-018-9600-0