Organized Crime as a Link between Inequality and Corruption
European Journal of Law and Economics
43 Pages Posted: 5 Apr 2017 Last revised: 28 Mar 2023
Date Written: March 1, 2023
Abstract
We study a model, which establishes a novel theoretical rationale for the empirically well-documented relation between inequality and corruption. According to our model, inequality can nurture corruption by empowering organized crime because collusion between local police forces and criminal organizations is more likely in societies characterized by high inequality or weak security forces. Law enforcement and organized crime have large incentive to collude due to efficiency gains from specialization. However, their agreement breaks down when the mobsters can no longer credibly commit to joint rent maximization and thus start to compete with law enforcement for citizens' wealth. The mobsters then non-violently monopolize the market for extortion by undercutting the police forces, similar to a strategy of predatory pricing. Criminal collusion is thus not very different from its corporate equivalent and, hence, similar policy measures should be promising. In addition, our model also suggests that the criminal organization's higher efficiency in extracting rents have a higher impact when the relative power between law enforcement and organized crime is rather balanced. Accordingly, when violent conflict becomes less predictable non-violent elements of relative power becomes more relevant. Our model also allows for the interpretation that without the existence of strong social norms against corruption, organized crime is hard to challenge.
Keywords: Inequality; Corruption; Organized Crime; Law Enforcement
JEL Classification: C72, D31, D63, D73, H42, K14, K42
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