Organized crime, extortion and entrepreneurship under uncertainty

This article investigates the impact of organized crime (OC) on economic activity in conditions of dynamic uncertainty. It shows that the hypothesis of rationality does not imply a one to one correspondence between illegal behavior and expected benefits and costs of the criminal action, since two different regimes may ensue from the threat of racketeering. These two regimes will be respectively characterized by acquiescence and no private protection activities, and by optimal private protection that will push OC into a zone of inaction. The latter outcome will correspond to a Stackelberg equilibrium of a preventive type in the sense that the action of the firm as a leader will confine OC in a zone of temporary inaction. Since the extent to which private protection will succeed in deterring the criminal is lower the higher is uncertainty, and the higher are public protection activities, switching from one regime to the other may thus be determined even by small changes in uncertainty or public protection. If public protection is below a critical level, the threat of extortion also creates incentives for the firm to enter an agreement with the criminal, by negotiating an acceptable rate of extortion. At the same time, however, higher public protection will favor a better deal for the victim in such a negotiation.