An Economic Model of Maritime Piracy: Part 1, Pirates and Shippers

Abstract

This chapter develops an economic model that examines the behavior of pirates and their potential victims (shippers) in the presence of a fixed enforcement policy. In other words, taking the expected sanction as given, we derive the optimal effort of pirates to locate and attack potential targets and of targets to avoid contact and attack. We then examine how exogenous changes in the expected sanction affect the equilibrium level of offensive efforts by pirates and defensive efforts by shippers. The results show that greater third-party enforcement will generally reduce pirate effort but will also tend to ‘crowd out’ defensive efforts by shippers. In this sense, public enforcement and self-enforcement are substitutes. An alternative response to piracy by shippers when confiscation of cargo is the risk is to adjust the cargo to make it unattractive to pirates. We show that, in contrast to self-defense, this type of ‘self-insurance’ by shippers is complementary to third-party enforcement.