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Payment, Protection And Punishment

Author

Listed:
  • Alastair Smith
  • Federico Varese

Abstract

A game theoretic model is used to examine the dynamics governing repeated interaction between Mafiosi running extortion rackets and entrepreneurs operating fixed establishments. We characterize the conditions under which violence occurs. Entrepreneurs pay protection money to the Mafia because they fear the Mafia's ability to punish. However, the entrepreneurs' willingness to pay encourages opportunistic criminals (fakers) to use the Mafia's reputation and also demand money. We show that two phenomena drive the repeated interaction between criminals and entrepreneurs: reputation-building and readiness to use violence on the part of the Mafiosi, and attempts to filter out fakers on the part of entrepreneurs. These two phenomena lead to turbulence: as entrepreneurs filter out fakers by not paying some of the times, some real Mafiosi are not paid and punish non-payment to establish their reputation. As Mafia reputation is re-established, fakers have again an incentive to emerge, setting in motion a spiral of never-ending filtering and violence. We also show how external shocks to this relationship, such as changes in policing practices, succession disputes within the Mafia or inflation, often lead to violence until beliefs are re-established. We conclude that a world where mafias operate is inherently turbulent. This conclusion goes against the widespread perception that racketeers are able to perfectly enforce territorial monopolies.

Suggested Citation

  • Alastair Smith & Federico Varese, 2001. "Payment, Protection And Punishment," Rationality and Society, , vol. 13(3), pages 349-393, August.
  • Handle: RePEc:sae:ratsoc:v:13:y:2001:i:3:p:349-393
    DOI: 10.1177/104346301013003003
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    References listed on IDEAS

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    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. Alt, James E. & Calvert, Randall L. & Humes, Brian D., 1988. "Reputation and Hegemonic Stability: A Game-Theoretic Analysis," American Political Science Review, Cambridge University Press, vol. 82(2), pages 445-466, June.
    3. Varese, Federico, 2001. "The Russian Mafia: Private Protection in a New Market Economy," OUP Catalogue, Oxford University Press, number 9780198297369.
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    Cited by:

    1. Hume N. Johnson & Joseph L. Soeters, 2008. "Jamaican Dons, Italian Godfathers and the Chances of a ‘Reversible Destiny’," Political Studies, Political Studies Association, vol. 56(1), pages 166-191, March.
    2. Catherine Hafer & Ethan Bueno de Mesquita, 2005. "Commitment Problems and the Political Economy of States and Mafias," 2005 Meeting Papers 812, Society for Economic Dynamics.
    3. Rachel Sabates-Wheeler & Philip Verwimp, 2014. "Extortion with Protection: Understanding the effect of rebel taxation on civilian welfare in Burundi," Working Papers CEB 14-004, ULB -- Universite Libre de Bruxelles.
    4. Federico Varese, 2005. "How Mafias Migrate: The Case of the `Ndrangheta in Northern Italy," Economics Series Working Papers 2005-W59, University of Oxford, Department of Economics.
    5. Alberto Alesina & Salvatore Piccolo & Paolo Pinotti, 2019. "Organized Crime, Violence, and Politics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(2), pages 457-499.
    6. Federico Varese, 2005. "How Mafias Migrate: The Case of the `Ndrangheta in Northern Italy," Oxford Economic and Social History Working Papers _059, University of Oxford, Department of Economics.
    7. Ethan Bueno De Mesquita & Catherine Hafer, 2008. "Public Protection Or Private Extortion?," Economics and Politics, Wiley Blackwell, vol. 20(1), pages 1-32, March.
    8. Peter T. Leeson & David B. Skarbek, 2010. "Criminal constitutions," Global Crime, Taylor & Francis Journals, vol. 11(3), pages 279-297, August.
    9. Corinna Elsenbroich & Jennifer Badham, 2016. "The Extortion Relationship: A Computational Analysis," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 19(4), pages 1-8.
    10. Sirianni, Antonio, 2019. "The Specialization of Informal Social Control: Fighting in the National Hockey League from 1960-2012," SocArXiv j9qpd, Center for Open Science.
    11. Nicholas A. Curott & Alexander Fink, 2012. "Bandit Heroes: Social, Mythical, or Rational?," American Journal of Economics and Sociology, Wiley Blackwell, vol. 71(2), pages 470-497, April.
    12. Leeson,Peter T., 2014. "Anarchy Unbound," Cambridge Books, Cambridge University Press, number 9781107629707, September.
    13. Peter T. Leeson & Douglas Bruce Rogers, 2012. "Organizing Crime," Supreme Court Economic Review, University of Chicago Press, vol. 20(1), pages 89-123.
    14. Leeson, Peter T., 2010. "Pirational choice: The economics of infamous pirate practices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 497-510, December.

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