Joint with Omar García-Ponce.
Mafia organizations and other types of organized crime dominate black market activities using violence and intimidation to enforce their dominance and to settle disputes, exposing the inability of the state both to retain the monopoly of violence and to maximize social welfare. While such state failures may seem intuitive in weakly institutionalized environments that lack state capacity, their persistence is puzzling in highly industrialized countries with democratic institutions and strongly institutionalized legal systems. Some of the best-known examples include the Italian mafias and the yakuza in Japan. Why do mafias persist? We present a model of crime, corruption, and political transitions which provides a unified framework for studying the impact of economic and political factors on the persistence of mafias. A key finding is that societies can sometimes be caught in “crime traps” where law enforcement paradoxically increases crime. Whether a country is in a crime trap depends largely on economic factors, including the relative value of legal sector work as compared to criminal activity. Finally, we embed this illegal sector equilibrium into a two-period model of policy-making with stochastic political transitions. According to the model, societies in crime traps that have dominant parties are more likely to have stronger mafias because dominant-party incumbents will take actions that induce collusion among criminal organizations.