Actors and Organization that Commit Criminal and Corrupt Acts

‘It’s Not Personal, Sonny. It’s Strictly Business’:

Mafias and Cartels

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Week 8: Wednesday

• Continue with study of Organized Crime Groups by looking at mafias

• Origins of the Sicilian Mafia (Gambetta reading)

• Criminal “Codes” that help to explain the furtherance and success of OCG’s criminal activity, including how they solve collective action and coordination problems (Gambetta supplemental reading)

• “Democracy in Latin America with Mike Albertus” podcast

• Quiz section: discuss Gambetta on Origins of Sicilian Mafia

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Strategic Interaction• Recall from Monday: in a collective action problem, both sides have incentives

to Defect (regardless of what the other player does), so both Defect

• Neither side will “trust” the other to Cooperate, but it’s not just about trust –both sides can see pay-offs and equilibrium Defect is the rational strategy

• There is a world where the pay-offs for cooperating>defecting, and both would do better to Cooperate, but both sides want to avoid the “sucker’s pay-offs” where they cooperate but the other person defects

Can no one be trusted?!?!

How would they get to new equilibrium where they both cooperate?

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Can no one be trusted??

Solution? Mafias“A vaccaro (cattle breeder) I interviewed in Palermo succinctly expressed the core elements of the hypothesis I wish to present: ‘When the butcher comes to me to buy an animal, he knows that I want to cheat him. But I know that he wants to cheat me. Thus we need, say, a Peppe [that is, a third party] to make us agree. And we both pay Peppe a percentage of the deal.”’

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Mafias• Mafia: “a specific economic enterprise, an industry which produces,

promotes, and sells private protection” (Gambetta).

• Protection

-when one party does not trust the other to comply with the rules or an agreement (Cooperate), protection becomes desirable (so both sides have guarantees that the other will Cooperate and not Defect).

• “The main market for mafia services is to be found in unstable transactions in which trust is scarce and fragile” (Gambetta).

• “Peppe” can be a single mafiosi, mafia group, or group of mafia organizations working together

• Why is protection “private?” – absence of the state to provide it for the public, and mafia providing on marketplace with many individuals!

So core element of mafia: selling private protection

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Mafias: sell protection against “sucker’s pay-offs”

3, 3 1, 4

4, 1 2, 2

C DC

D

A2

A1

Equilibrium?

Mafias• Mafia: sells private protection on a private basis, so price varies, can be cheap or

expensive depending on the 1) value of what has to be protected, 2) the likelihood that someone wants to cheat, and 3) competition for supply affect price and quantity of “protection”

• Not everyone is offered “protection,” so mafia is like a monopoly supplier• In market for protection, Mafia has - information about buyer and seller (can be legal or illegal)- guarantees the “sale” (protection, illicit even if the good itself is legal)• But wait? Isn’t the state supposed to provide protection? - Protection requires rule of law and “strong state” that governs- This involves protection of legal sales, but not illegal sales- everyone should have equal access, or the rules apply equally to all (public good),

and not be arbitrary or only arise from market for bent rulesBut in the absence of the state, mafia provision of protection can help individual

interests, but comes at the expense of society’s well-being – why?8

Who needs a mafia?• Where “property rights” are insecure…

- property rights: the rule that determines how economic resources are distributed (who gets to own what and how?)

- rules regarding land, banking, markets, trade, etc.

- secure property rights means every actor knows the rules, some will benefit, some will lose

- insecure property rights means that people don’t know the rules, the rules are shifting or uncertain, actors don’t obey the rules, survival of the fittest

- “main market for mafia services is to be found in unstable transactions in which trust is scarce and fragile” no legitimate enforcement agent providing protection because the exchange is illegal OR the state doesn’t provide protection

- Mafia can protect buyer, or seller, or both

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Mafias and the Market• Many important “markets” for the mafia

- Market for protection: What are mafias supplying? Property rights, justice, laws, “guarantees,” etc. protection for illegal or legal sales, but “protection” by private actor is illegal

- Market for illegal goods: mafia can provide protection and dispute mechanisms between suppliers and demanders of illegal goods and/or buy/sell illegal goods themselves

- Market for bent rules: mafias bribe public officials or seek government contracts to avoid prosecution and gain access

- Market for legal goods: mafia can supply or demand any number of legal goods to help their criminal behavior, and/or take illegal profits and launder them into legal supply/demand of legitimate business like other OCGs

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Mafia characteristics• All sides need guarantees because of mutual distrust –> mafia can sell

information but also guarantee purchase

• Mafia can gain monopoly over territory and help players avoid paying real tax to state or extortionary bribes to the state (the “tax” to a mafia is better/cheaper than a “tax” to the state)

• Violence, coercion, and extortion employed to “supply protection,” but mafias use violence a means to that end not an end in itself

• Protection involves control of territory (geographic and/or economic) similar to “control of market” (restrict entry, monopoly supply, cartel)

• Protects others, and himself/group, against cheats and competitors, fraudulent “suppliers”

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How do Mafias work?• Oathing rituals to gain and maintain loyalty, use of “symbols” to signal reputation since

real advertising would be illegal (The “Trademarks” per Gambetta)

• “Omerta” – maintaining silence and secrecy under adverse conditions

• Mafia needs

-a credible reputation, good name is essential (often literally a family name that can’t be faked)

-robust information gathering & appearance of knowing a lot (intelligence network)

- physical and psychological strength (violence can be realized or threatened)

-mafiosi must be stronger than the parties she protects

-and! tougher than her competitors (so buyers choose her over an alternative)

• “Advertising” is hard

- on an illegal market can’t market the illegal service or good, often face to face transactions

- and history of transactions, matters a lot (how is this different than buying goods on a legal market? “Yelp” your mafia?)

• Ownership: fixed capital (the name and reputation), so hard to start-up and transfer the mafia business, if mafia boss dies, typically “stays within the family”

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Mafias and Coordination Games• Mafia can be useful where both sides have incentives to Defect (cheat), as in

collective action problem

• Mafia provides information to players, trust, and protection of the exchange you don’t trust the other player, but you trust the mafia

• Therefore, mafia can also help where players have clear incentives to coordinate their actions (both Cooperate), but need to be “reminded” to trust the other party “Battle of Sexes”/Coordination Game

• How does mafia help?

- mafias often negotiate (parlay) action between various actors (coordination)

- mafias absorb the potential risk of defection by providing protection, agree to pay cost if one side cheats (enforcement)

- “deliver votes” to certain politicians, voter mobilization

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Mafias help players in coordination game

4*, 4* 1, 3

3, 1 2*, 2*

C DC

D

A2

A1

Equilibrium

Equilibrium

Origins of the Sicilian Mafias (Gambetta)

• Is it all about

- economy?

- politics?

- culture?

Why did the mafia arise in Sicily and not other parts of the Mediterranean, other parts of Italy, and only in certain parts of Sicily?

Why did it arise when it did and not before or after? 15

Origins of the Sicilian Mafias

• Italy in the 19th century:

- end of feudalism transforms the economic prospects of landowners and peasants in the 19th century

peasants can now work for themselves and reap their own profits

- end of feudalism transforms politics more people gain rights, country unifies in 1860s, but not without political battles before and after

- end of feudalism transforms society now class conflict between land owners and business and labor and rural peasants – conflict and violence, and lots of “armed bandits”

Overall, property rights now becoming privatized (although somewhat insecure), and individuals, actors, and business need protection….

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Origins of the Sicilian Mafias

• Production of agriculture increasing in rural areas in Sicily, business also growing in towns and cities

• But all actors, from land owner who runs farm, to peasant picking fruit, to person transporting fruit, to seller in the market, to buyer in the market –they all fear they could be cheated

Why? No strong state ensuring property rights, roving bandits and attempts at public policing

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Origins of the Sicilian Mafias• In Sicily:

- land becomes more available and protection grows more scarce

- in Western Sicily, landowners frequently lived in towns/cities rather than on the rural upcountry land they own, they worry about what’s happening on the farm

- peasants must be policed and could rebel if mistreated

- enforcement of property rights over land, livestock, and the transportation and trade of goods

It’s the trade in goods (fruit, grain) from the countryside to cities that needs protection originally rise of the mafia who protect transportation

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Origins of Sicilian Mafias

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Are Mafias like states or businesses?

• If mafias provide protection, how are they different than states?

• If mafias are profit driven and supply/demand black market goods, market for bent rules, and even legal goods, how are they different than firms?

Regardless, mafias not only address collective action and coordination problems in the world, they also face these problems internally in their own organization and characteristics of mafias help to solve their own strategic

dilemma among their members ….

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“Criminal Codes” (Gambetta)

• How do mafias and other organized crime groups overcome their own internal collective action and coordination problems?

• Strategic Interaction (game theory) also applies within groups

• Groups want fewer transaction costs of “doing business” when it comes to the management of their organization:

- they develop rules, institutions, and practices that assist cooperation and promote trust among members

- trust important because group engaged in illegal activity and must avoid detection

- At the same time as conducting illegal activity successfully

• Therefore, groups have signals, practices, and cooperate solutions that help reveal type to other members and avoid detection from law enforcement….

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Criminal Codes

• How do criminals communicate with each other privately?

- want signal S to be understood by actor A but not actor B

- don’t want signal to be jammed or noisy

• 3 circumstances:

- communicate with colleagues and do not want rivals or law enforcement to intercept, or if they do, can’t interpret meaning of S (communication problem)

- identify fellow members of organizations who they do not yet know personally while not being recognized by a third party (identification problem)

- advertise goods to potential buys, while avoiding detection (advertising problem)

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Communication Problem

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Identification Problem

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Advertising Problem

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Criminal Codes

• Criminal codes therefore help reduce transaction costs to assist members and the group in many activities (identifying each other, committing crimes, avoiding detection, advertising services)

• Criminal codes are just mechanisms that promote trust, help members Cooperate towards a joint goal

• Without these codes, members wouldn’t be able to cooperate and work towards a joint goal as efficiently, very costly to coordinate action

• Criminal codes: “culture” that helps overcome collective action and coordination problems

How do these codes assist the operations of the “bureaucracy” of a mafia and the chain of delegation?

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Mafia Bureaucracy

Lh

Bi

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A stable equilibrium?

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• If the market is illegal or mafias participate in legal market, what happens when the state comes sniffing around? … (NYT story on olives)

• If the market for protection becomes competitive, and mafias are violent, despite gains from “protection,” the whole system becomes very violent … (drug cartels in Mexico, Netflix: Narcos: Mexico)

• If the Mafiosi at the top dies or proves a “bad boss” – what do other members of the group do? What do other mafia groups do? (El Chapo in Mexico)

• For the person at the top – how well does an organization run if it’s based on loyalty, oaths, and rituals? What happens if there is internal disagreement, or people lying/cheating/not performing? (the Corleone’s in The Godfather)

Mafia codes or accountability?

Lp

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CitizensLegislatureJudiciary

Mafias as Cartels

Mafia 2

Government30

Mafia 3Mafia 1

Where does accountability come from?

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• Within organization:

- Boss has almost unchecked management over members (foot soldiers)

- Codes of the underworld ensure smooth operations in delegation chain

- Only when boss or members violate rules do others exert accountability

• Outside of organization from law enforcement:

- Mafias in Italy (and US) took decades and decades for law enforcement to successfully investigate, prosecute, and convict

- Codes of the underworld make it very hard to infiltrate or gather evidence

- “Plata o plomo” suggests political actors often complicit through bribery or extortion

- Requires member to “turn state’s evidence/witness”

• Outside of organization from other OCGs:

-OCGs can work together and collude crime and corruption increase

-OCGs can go to war with each other violence

A stable equilibrium?

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But wait!

Are we really talking about mafias as organizations that face problems like any public agency or firm? Are mafias really no different than the DMV or Amazon?

Or, are we describing a problem that only exists because public agencies aren’t doing their jobs in the first place, creating a lack of political order

How should any organization trying to survive and make a profit act if there is basically no government at all, or very weak government ….

Something that sounds more like anarchy than any kind of political order ….

Next week!

Anarchy and the Apocalypse in the Criminal (Under)World:

Pirates, Gangs, Cults, and Terrorists!

Questions?

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