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

Luigi Balletta and Andrea Mario Lavezzi

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

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.

Keywords: Organized Crime; Economic Structure; Sicilian Mafia; Asymmetric Information; Principal-Agent Theory (search for similar items in EconPapers)
JEL-codes: C72 D86 K42 (search for similar items in EconPapers)
Date: 2019-03-01
New Economics Papers: this item is included in nep-eur and nep-law
Note: ISSN 2039-1854
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