Joint with Omar García-Ponce.
Mafia-type organizations dominate black market activities using violence and intimidation, exposing the inability of the state both to retain the monopoly of violence and to maximize social welfare. While such state failures are unsurprising in low state capacity contexts, their persistence is puzzling in highly industrialized societies with democratic institutions. Two prominent examples are 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. 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 have an incentive to collude with the criminal sector and use law enforcement to consolidate that sector into a small number of powerful criminal organizations.