Criminal groups are networks

• OC: attempt to regulate/control the production/distribution of a given commodity unlawfully
  • This tells us what criminal groups do, not how they are structured
• Structure does not define criminal groups, but all criminal groups have some kind of structure
• All criminal groups are networks of individuals connected by relationships

How many members/nodes?

What are the pros and cons of each?

Decentralized versus centralized networks

What are the pros and cons of each?

Compartmentalization

What are the pros and cons of each?

Think-pair-share: properties of criminal networks

The fundamental problems all organizations face

• In Lecture 3 we learned about how cooperation between people can be hard
  • Collective action problem: individual self-interest produces worse group outcomes
  • Free-rider problem: individuals want to enjoy group benefits without contributing
• Today we will go into detail on a related issue, the principal-agent problem:
  • When one person delegates a task, the other person may have different interests
  • The person in charge can’t perfectly monitor how the task is carried out
• Criminal groups face all these problems, too
  • Members are tempted to steal from or inform on the group
  • Members are tempted to free-ride on others’ work
  • Leaders cannot ensure that members follow orders perfectly
• Legal organizations solve these with contracts, courts, and formal authority
• Criminal organizations must solve these problems without any of these

Collective action problem review

• Collective action problem: individuals self-interest produce worse outcomes for the group
  • …Even though cooperation would make everyone better off

Collective action in small vs. large groups

• In small groups, voluntary cooperation can be feasible
  • Each person receives a significant share of the benefits
  • Each person’s behavior is visible to others: defectors can be identified and sanctioned
  • Example: doing the dishes with one other roommate, your policy brief
  • Example: a small mafia family working together

Let’s play a game! (Public goods in action)

• You start with 5 tokens, and you want to have as many tokens as possible at the end
• Choose how many tokens to contribute to a public pot (any whole number, 0–5)
• The pot will be multiplied by 2 and split equally among everyone in the room
• Your final payoff = your tokens you kept + your share of the multiplied pot

Public goods game results

• The pot will be multiplied and split equally among all \(N = 90\) players
• Average contribution = \(X \approx 2.5\)
  • Pot = \((2.5 \times 90 \times 2 = 450) / 90 = 5\) tokens back to everyone
  • Plus whatever tokens you kept, so each individual gets kept tokens + \(5\)
  • Individual payoff = (5 − your contribution) + \(5\)
• If you contributed 0, you “won” because you ended up with 10 tokens
• If you contributed 5, you “lost” because you ended up with 5 tokens
• But if everyone contributed 0: everyone walks away with 5 tokens
• But if everyone contributed 5: everyone walks away with 10 tokens

The principal-agent problem

• Principal: the party who delegates a task (e.g., a gang leader)
• Agent: the party who carries it out (e.g., a foot soldier)
• The agent knows things the principal does not: information asymmetry
• The agent has their own interests, which may differ from the principal’s

Solving the principal-agent problem

Align interests between principal and agent and/or reduce information asymmetry by:

Think-pair-share: organizational problems

• Legal organizations deal with organizational problems with various mechanisms
  • Contracts, courts, licensing, and formal monitoring
• Criminal organizations cannot use these!
• For discussion:
  • A gang leader can’t sue a foot soldier who skims drug revenues. What can they do instead?
  • How might not being able to use courts change who a criminal organization can recruit?
  • Does the size of the organization change how these problems play out?

Why illegality makes organizational problems harder

1. Recruitment and vetting:
   • Can’t advertise, credential-check, or verify who you’re bringing in
   • \(\rightarrow\) No way to know if a new member is trustworthy before it’s too late
2. Internal discipline:
   • Can’t take a defector to court or fire them through formal channels
   • And information asymmetries are strong because of secrecy required
3. Reputation and branding:
   • Can’t publicly signal quality or build a visible track record while staying hidden
   • \(\rightarrow\) But you still need a reputation to be effective
4. Secrecy vs. efficiency:
   • Every new member who knows more is also a bigger liability if caught
   • \(\rightarrow\) Growth and concealment pull in opposite directions
5. Leadership succession:
   • No formal mechanism to transfer power when a leader is arrested or killed

Mechanism 1: Violence

• Violence is the criminal organization’s functional substitute for courts
  • Punishment for defection: members who steal, inform, or shirk face physical sanction
  • Reputation building: a credible reputation for violence deters defection before it occurs
  • Territorial control: violence establishes and protects market share

Mechanism 2: Trust and social ties

• Kinship: family members are harder to betray and easier to trust
• Ethnicity and shared community: overlapping social networks increase the cost of defection
  • This is why OC often recruits heavily from specific communities, neighborhoods, or families
• Long-term relationships: repeated interaction builds trust over time
  • Costs of defection are high if they end a valuable relationship

Mechanism 3: Codes of conduct and rituals

• Written or unwritten rules and articles of membership
• These codes function as informal institutions
  • Shared rules that coordinate behavior without formal enforcement
• They work when the cost of violating the code exceeds the benefit
  • Costs include social ostracism or violence

For Wednesday: Quiz

• No readings for Wednesday, but Quiz 1 is on Wednesday!
  • Taken on Canvas, so please bring your laptop
  • 25 minutes, at the end of class
  • Short response, 3–5 paragraphs
  • Spelling or grammar mistakes OK as long as it doesn’t affect the substance of your answer
  • Attempt to answer every part of the question!
  • Engage with key concepts from the course and explain what they are/mean, why it matters
    • A demonstration that you understand the ideas we have been discussing
    • You will not be required to memorize, e.g., a proper noun or a specific date
  • The quizzes are non-cumulative. This quiz will cover Part 1 of the course
  • Try explaining the key concepts from those lectures to a someone outside the class
  • I have office hours Mondays 1-3 p.m., sign up here
    • If you cannot make that time but still want to meet, email me and our TA, Erin

How will the quiz be graded?