The Economics of Organized Crime

G. Fiorentini and S. Peltzman

Cambridge University Press: Cambridge
1995
ISBN 0 521 47248 2
£30.00
xvii + 301 pp.

Order this book

The papers published in economics journals have the following format: a brief introductory paragraph is
followed by the presentation of a formal model, with a concluding section summarizing the mathematical
results. A model can be interesting for a sociological audience when the author reaches conclusions that
are consistent with empirical evidence. This generally happens when the assumptions are plausible. In
such cases, the model highlights the underlying (rational) mechanism that motivates agents, predicts
behaviour and usually has a policy suggestion to offer. On the contrary, when the starting assumptions
are outlandish and the ‘stylized facts’ trivial, the model may display a lot of intelligence, but has little
sense.

This book contains an introduction and ten chapters, each followed by the comments of a discussant.
Seven contributions are economists’ papers of the type outlined above: they present a model which
formalizes aspects of organized criminal groups’ activities and their relationships with the state (oddly,
section IV contains two papers that deal with tax evasion by legal firms: even granting the widespread
confusion over what is ‘organised crime’, they go well beyond the self-imposed boundaries of the
book’s title).

All papers pass the test of ‘intelligence’: they are professionally crafted and often ingenious. Do they
pass the ‘sense’ test? In most cases, the answer is mixed. For instance, Polo (chapter 3) models criminal
organizations’ hiring decisions, characterized as optimal and complete contracts. The model predicts that
when two organizations coexist one next to the other, they have no incentives to hire recruits that live
on the borders of the two territories. Strips of ‘no-man’s lands’, in which neither organization hires any
affiliate, develop. This conclusion certainly goes against established evidence from Sicilian cities, where
each local district is controlled by an unique family, with no strips of ‘no-man’s land’. Celentani, Marrelli
and Martini (chapter 10) study how a government might regulate ‘victimless illegal activities’, ie. those
criminal activities for which there is a demand, such as the sale of narcotics, arms, and illegal gambling.
The concept of ‘victimless activities’ obfuscates the fact that criminal organizations are often multi-
purpose firms, engaging both in the supply of goods demanded by the market and the supply of ‘offers
that cannot be refused’. Moreover, as pointed out by the discussant (Scarpa), the concept of ‘victimless
activities’ is dubious: rather than the individual, the victim of a flourishing drug or arms market is the
community. Wisely, the discussant urges the reader to interpret the normative suggestions of the paper
with ‘some caution’ (p. 272). The commentator (Sam Peltzman) of the following paper goes as far as
labelling one of its central assumptions as ‘stupid’ (p. 293).

The chapter that in my opinion passes both the sense and the intelligence test is Skaperdas and
Syropolous’s Gangs as primitive states (chapter 3): it draws consistently on Jankowski’s (1991)
extraordinary ethnography of gangs in the USA, has realistic assumptions and reaches interesting
conclusions. It shows that in anarchy entrepreneurs who invest more resources in acquisitive activities
(such as military technology) receive a bigger share of overall endowment than those who invest in
productive activities. The outcome is a fall in the total welfare of the community. Furthermore, if there is
an option out of anarchy, agents who have a comparative advantage in productive activities will migrate.
Poor economic performance and migration are both well known features of areas riddled by gangs and
organized crime.

The three remaining papers do not conform to the above format: Anderson (chapter 2) suggests the
marriage between Transaction-Cost Economics and the study of organized crime, while Tanzi (chapter
7) offers his views on the relationship between corruption, the state and culture. The essay by Gambetta
and Reuter (chapter 5) combines industrial organization theory with the presentation of empirical
evidence, by far the most appealing paper of the entire collection.

The attractive feature of the book are the comments offered by the discussants at the end of each
chapter. From the (assumed) self-interest of the editors, however, they may be a liability: they give

Copyright Sociological Research Online, 1997

 away most of the weaknesses of the book, but certainly make the volume a more interesting read. In
the end, The Economics of Organized Crime is - to borrow the words of one discussant - ‘an important
stepping-stone ... not the ultimate answer’.

Federico Varese
Nuffield College
University of Oxford

Reference
Jankowski, K. (1991) Islands in the Streets. Berkeley: University of California Press.

Copyright Sociological Research Online, 1997