The mafia seeks to extort money from capital producers by intimidating them with the threat of violence should they refuse to comply. This way of modelling organized crime is common in the academic literature e. We suppose that, in the event of being caught, the mafia incurs a punishment, which includes the seizure of at least some of its illicit earnings.
In accordance with other analyses as well as observed practice , we consider the severity of the punishment as being commensurate with the gravity of the offence the level of extortion in our case. Another cost to the mafia relates to the means by which it seeks to enforce its illicit profiteering. Such threats must be credible, and we assume that it is costly for the mafia to ensure this. This cost is incurred ex ante and is independent of the number of potential victims: the mafia must arm itself before knowing which individuals are susceptible to extortion, after which the same threat can be applied to all individuals.
The first property shows that the level of extortion is higher, the lower is the exogenous cost to the mafia of enforcing it. The second property similarly reveals that the amount of extortion is increased when the mafia faces a lower expected punishment for its offence.
The above results are reflected in capital production activity, as given in The first and second of these properties are allied directly to the higher levels of extortion that the mafia chooses when faced with lower costs of pursuing such activity i. Under such circumstances, capital production is less profitable and therefore less attractive to a greater number of entrepreneurs.
Our modelling of corruption centers on the behavior of law enforcers and their relationship with the crime cartel. In our previous analysis we assumed that the police acted with full integrity in executing its crime prevention duties. This meant that capital producers had at least some chance of being protected against mafia predation. A police officer who is corrupt seeks to supplement his old-age consumption by accepting bribe payments from the mafia, which is then free to commit its offences.
Bribe-taking is risky because of the possibility of being caught and prosecuted. Intuitively, a police officer is willing to accept a bribe payment that is at least equal to the expected punishment for his crime. The existence of corruption affects entrepreneurs both directly and indirectly. In the presence of a corruptible police force, the mafia has the opportunity to pursue its racketeering activities with the compliance of law enforcers.
It does so by extorting payments from capital producers using the threat of violence as a means of enforcement, and by offering bribes to police officers in return for their agreement to overlook such behavior. As previously, the mafia makes its decisions optimally in a way that maximises its expected payoff. Accordingly, lower bribe payments provokes the mafia to extort more, the reason being simply that the mafia keeps more of its illegal income.
The basic message of our analysis so far is uncontroversial and confirms what one generally presumes—namely, that an economy performs better when it is free from all crime and corruption than when it is saddled with either or both these. Our primary interest is the question of whether an economy is damaged by more or less if crime occurs alone than if crime co-exists with corruption. We study this as follows. It is this which deters capital production by increasing the costs to entrepreneurs of undertaking such activity. The question of which type of environment suffers the most damage is therefore a question of which type of environment suffers the most racketeering.
The last of these inequalities compares the expected extortion payment in the presence of crime alone with the extortion payment in the presence of both crime and corruption. By resolving this inequality, we resolve the other two.
The above analysis demonstrates how the effects of organized crime on economic activity may depend on the participation in corruption by those responsible for preventing such crime. A priori, this dependence is ambiguous in the sense that the damage inflicted by organized crime may be greater or less when corruption exists than when it is absent. This is our key result which has not, to our knowledge, been established before.
The ambiguous prediction of our analysis may appear somewhat surprising. One might typically presume that the combination of organized crime and corruption is more damaging to an economy than organized crime alone.
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We have articulated the reasons why this may not be the case. This paper has sought to cast further light on the macroeconomic implications of organized crime and its interaction with corruption. These two phenomena are amongst the most vivid examples of poor quality governance and badly functioning institutions. Their adverse effects on growth and development are well documented, and the fight against each of them remains high on the agendas of national and international agencies.
What is less well understood is the extent to which their impacts might be reinforced or subdued through linkages between them.
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Making in-roads to this has been our primary objective in this paper. Our analysis shows how organized crime alone creates an unfavorable climate for business activity by raising the costs of this activity through extortion. The upshot is that growth is lower than would otherwise be the case. This is what one would expect, but our modelling strategy is designed to go much further in demonstrating how the impact of organized crime may be conditional on the presence of corruption.
As our results indicate, this conditionality could go either way—organized crime may be more or less damaging if it co-exists with corruption.
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The intuition is that since corruption operates as a tax on criminality, the outcome depends on the expected payoffs of the crime syndicate when having to pay bribes to corrupt law officers. This, in turn, depends on the trade-off between a lower supply of crimes and the probability these crimes are more likely to be successful. If corruption, despite its direct cost to criminals, leads to higher lower expected payoff from extortion, then the growth-diminishing effect of crime is greater smaller in the presence of corruption. Ultimately, however, whether organized crime distorts economic growth by a different degree when acting alone compared to when co-existing with corruption, is an empirical question.
This is evidenced in a report by the Center for the Study of Democracy which focuses on the links between organized crime and corruption in 27 European Member States using a statistical analysis of various indicators and interviews. We abstract from the use of human capital as an input, although one could visualise a scenario where organized crime and corruption can discourage the accumulation of knowledge.
Blackburn and Chivers consider a model where agents are not prevented from investing in human capital but it is not in their interests to do so because the loss associated with a risky venture is too great to make the venture attractive, even if it offers the prospect of high rewards. A similar principle can apply when agents decide on their level of human capital investment when operating within a risky environment, riddled with illegal activities. This aggregate externality—a common feature of endogenous growth models—allows us to work with a simple AK technology, where the social returns to capital are constant.
Our main results would not change were we to assume diminishing returns to capital, instead. In this framework, entrepreneurs have perfect access to the loans market. For the purposes of our analysis, we treat the existence of criminal activity as given. The incentives for individuals to engage in such activity is elucidated in the pioneering work of Becker Our focus is different, being centered on the effects rather than causes of crime when this is perpetrated by a well-established, organized criminal network.
The only change to the circumstances of workers is a lump-sum tax, which is used to pay the salary of law enforcement officials. This is only relevant to computing the dynamic general equilibrium, as we elucidate at the appropriate time.
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This is largely for expositional purposes. Our analysis may be extended, or interpreted more broadly, to cover the functioning of higher levels of law enforcement i. This is consistent with the empirical observation that entrepreneurs perceive racketeering as an extra risky expense in doing business e. That is, organized crime is the perpetration of illegal activities for material benefit by coordinated groups of individuals who ply their trade through extortion, corruption and subversion using extreme violence e.
This is a pecuniary punishment, but there are obviously non-pecuniary punishments as well e.
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The former may be considered as encompassing the latter in the sense that it represents the illegal income that could have been earned if a criminal was not incarcerated. In any case, the separate inclusion of a non-pecuniary punishment is a trivial extension to the model that would not alter the main results. The mafia needs only to demonstrate that it has the capabilities of inflicting harm.
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At the extreme, its possession of just one explosive device, one firearm or one ruthless thug poses the same threat to all potential victims. Put the other way, criminal activity is lower when the expected penalty for this activity is higher—an implication that accords with the spirit of Becker The reason for the former is that each generation of mafiosi extracts its income in the second period of life.
For simplicity, we shall assume that all police officers are susceptible to bribery. Our main results would not change were we to consider some fraction of them as being non-corruptible. We do not differentiate between law enforcers. This assumption reflects the idea that the judiciary may be able to observe the amount of extortion, but not the amount of bribe payments. For example, whilst capital producers may be quite willing to report how much the mafia has extorted from them, corrupt law enforcers would want to conceal their bribe income.
The most that the judiciary knows is that bribes are proportional to the amount of extortion, and therefore sets its punishment in the same way. One may conceive of this probability as depending on r , the probability that corrupt law enforcers also evade prosecution. A reduction in this tax encourages the mafia to engage more in these activities.
The effect of anti-corruption strategies or lack of on criminal activity is an important issue, though it is not one that we pursue in this paper. There are several analyses that do so, indicating the many nuances and complexities of the issue e.