Paper #246

Title:

The economics of organized crime and optimal law enforcement

Author:

Nuno Garoupa

Date:

September 1997 (Revised: December 1997)

Abstract:

This paper extends the optimal law enforcement literature to organized crime. We model the criminal organization as a vertical structure where the principal extracts some rents from the agents through extortion. Depending on the principal's information set, threats may or may not be credible. As long as threats are credible, the principal is able to fully extract rents. In that case, the results obtained by applying standard theory of optimal law enforcement are robust: we argue for a tougher policy. However, when threats are not credible, the principal is not able to fully extract rents and there is violence. Moreover, we show that it is not necessarily true that a tougher law enforcement policy should be chosen when in presence of organized crime.

Keywords:

Crime, punishment, law

JEL codes:

K4

Area of Research:

Microeconomics

Published in:

Economic Inquiry, 38, 2, (2000), 278-288

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