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The economics of extortion: Theory and the case of the Sicilian Mafia

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  • Balletta, Luigi
  • Lavezzi, Andrea Mario

Abstract

This paper studies extortion of firms operating in legal sectors by a profit-maximizing criminal organization. We develop a simple taxation model under asymmetric information to find the Mafia optimal extortion as a function of firms’ observable characteristics, namely size and sector. We test the predictions of the model on a unique dataset on extortion in Sicily, the Italian region where the Sicilian Mafia, one of the most ancient criminal organizations, operates. In line with our theoretical model, our empirical findings show that extortion is strongly concave with respect to firm size and highly regressive. The percentage of profits appropriated by the Mafia ranges from 40% for small firms to 2% for large enterprises. We derive some implications of these findings for market structure and economic development.

Suggested Citation

  • Balletta, Luigi & Lavezzi, Andrea Mario, 2023. "The economics of extortion: Theory and the case of the Sicilian Mafia," Journal of Comparative Economics, Elsevier, vol. 51(4), pages 1109-1141.
    • Handle: RePEc:eee:jcecon:v:51:y:2023:i:4:p:1109-1141
    DOI: 10.1016/j.jce.2023.05.003
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    Cited by:

    1. Piemontese, Lavinia, 2023. "Uncovering illegal and underground economies: The case of mafia extortion racketeering," Journal of Public Economics, Elsevier, vol. 227(C).

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    More about this item

    Keywords

    Organized crime; Mafia; Extortion racketeering; Economic development; Optimal taxation;
    All these keywords.

    JEL classification:

    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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