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The Economics of Extortion: Theory and Evidence on the Sicilian Mafia

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  • Luigi Balletta
  • Andrea Mario Lavezzi

Abstract

This paper studies extortion of firms operating in legal sectors by a profit-maximizing criminal organization. We develop a simple principal-agent 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 most powerful criminal organization, the Mafia, operates. In line with our theoretical model, our empirical findings show that extortion is strongly concave in firm's size and highly regressive. The percentage of profits appropriated by Mafia ranges from 40% for small firms to 2% for large firms. We derive some implications of these findings on market structure and economic development.

Suggested Citation

  • Luigi Balletta & Andrea Mario Lavezzi, 2019. "The Economics of Extortion: Theory and Evidence on the Sicilian Mafia," Discussion Papers 2019/242, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    • Handle: RePEc:pie:dsedps:2019/242
    Note: ISSN 2039-1854
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    Cited by:

    1. Vivekananda Mukherjee & Paramita Mukherjee & Saheli Bose, 2022. "Extortion, competition among states and private investment in a federation: evidence from Indian manufacturing sector," Economic Change and Restructuring, Springer, vol. 55(2), pages 973-1004, May.
    2. Michele Battisti & Andrea Mario Lavezzi & Roberto Musotto, 2022. "Organizing Crime: an Empirical Analysis of the Sicilian Mafia," Papers 2205.02310, arXiv.org.
    3. Soeren C. Schwuchow, 2023. "Organized crime as a link between inequality and corruption," European Journal of Law and Economics, Springer, vol. 55(3), pages 469-509, June.

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    More about this item

    Keywords

    Organized Crime; Economic Structure; Sicilian Mafia; Asymmetric Information; Principal-Agent Theory;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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