Peter T. Leeson† Douglas Bruce Rogers‡
This paper investigates the industrial organization of criminal enterprise. We argue that differences in contestability across criminal industries crucially shape how producers in these industries organize. In more contestable criminal industries, producers use organizational hierarchy to enforce collusion and preserve their returns. However, hierarchy creates scope for boss self-dealing and so is costly. In less contestable criminal industries, where producers’ benefit from colluding is smaller, this cost exceeds organizational hierarchy’s benefit. Here producers organize “flatly” instead. To examine our hypothesis we explore history’s most infamous criminal organizations: the Sicilian Mafia and Caribbean pirates.
We thank Kenneth Binmore, Pete Boettke, Chris Coyne, seminar participants at Emory University, and especially Jesse Shapiro for helpful comments and suggestions on an earlier draft of this paper. Leeson thanks the Becker Center on Chicago Price Theory at the University of Chicago, where this research was partly conducted, and the Mercatus Center at George Mason University. † Email: firstname.lastname@example.org. Address: Department of Economics, George Mason University, MSN 3G4, Fairfax, VA 22030. ‡ Email: email@example.com. Address: Department of Economics, George Mason University, MSN 3G4, Fairfax, VA 22030.
Criminal organizations display significant variation in their organizational forms. Some, such as the Sicilian Mafia, are organized on the basis of a pronounced hierarchy (Arlacchi 1992: 21, 33, 34; Gambetta 1993: 68; Reuter 1983: 156). Hierarchical criminal organizations involve at least two levels of power and decision-making authority: (1) a higher level consisting of individuals who make autonomous decisions and use violence to regulate the behavior of individuals who occupy a lower level, and (2) a lower level consisting of individuals whose behaviors...