Studying organized crime from the inside

The gang’s franchise structure

• A central organization (“the board”) sits at the top
  • Owns the “brand,” controls territory, sets rules
  • Local gangs pay a fee to operate under the gang’s name
• Like a McDonald’s franchisee: use the name, follow the rules, pay a cut upward
• …but retain substantial day-to-day autonomy

Think-pair-share: the franchise structure

Recall the properties of criminal networks from Monday:

• Where does this gang fall on each dimension? What are the pros and cons of those choices?
• What does this organizational structure tell you about the environment the gang operates in?
• Where do you see the principal-agent problem in the franchise structure?
• How does the franchise model help and/or hurt with collective action?
• The rival gang used a different approach
  • Leader is a supplier: low-level members buy drugs upfront with their own money, then resell
  • What difference might that or did that make?

Revenues and costs

The gang’s finances look surprisingly like a small business operating on thin margins

Does anything surprise you from these tables?

The wage puzzle

• Foot soldiers earn approximately $6.60 per hour
  • This is below the federal minimum wage ($7.25)
  • During gang wars, members may be paid higher wages to help compensate risk
  • …But, annual mortality risk is high (for a foot soldier: roughly 1 in 4 over four years)
  • Why join? Rational choice? Psychology? Social networks? Structure?
• One answer: foot soldiers are not paid for today’s work, they are competing for a “prize”
  • Tournament theory: in hierarchies, high wages at the top are not just compensation
  • They are the prize that motivates everyone below to compete
• Criminal application:
  • Foot soldier today \(\rightarrow\) officer tomorrow \(\rightarrow\) local leader eventually
  • The “lottery” logic: most people lose, but the prize is large enough to motivate entry
  • Policy implication: if tournament logic drives entry, what would actually deter it?

Violence, the absence of law, and agency costs

• Gang wars are costly: profits go negative during fighting; drug demand falls 20–30%
• Yet the gang fights roughly one-quarter of the time. Why?
• No contracts → violence as dispute resolution
  • Gangs have no access to courts, property rights, or enforceable agreements
  • Territorial disputes cannot be settled legally \(\rightarrow\) fighting may be the only option
• Principal-agent problems within the gang
  • Foot soldiers benefit personally from building a reputation for toughness
    • …but unsanctioned violence triggers retaliation that is costly for the whole gang
  • Leaders cannot perfectly monitor or restrain foot soldiers
    • \(\rightarrow\) Individual incentives produce collectively worse outcomes

The hook: do pirates count as organized crime?

• Varese: OC attempts to regulate/control the production/distribution of a market unlawfully
  • Do pirates fall into this definition?
• An alternative definition:
  • Any long-term arrangement between criminals requiring coordination
  • …whose agreements cannot be enforced by the state
• But here is why pirates are worth studying:
  1. Pirates faced the exact same organizational problems:
     • Collective action problem
     • Free-rider problem
     • Principal-agent problem
  2. We can study why people became pirates through the frameworks we discussed in L4
  3. Yo-ho-ho!

Were merchant ships more disorderly than pirate ships?

• Pirate crews were large: hundreds of men living together at sea for months
  • Yet cooperation was surprisingly orderly, compared to law-abiding contemporaries
  • No courts, no contracts, or lawyers… and yet it worked arrgh-uably pretty well
• For contrast: how did legal merchant ships solve their organizational problems?
  • Rich owners did not want to live life at sea, so they hired captains to monitor crews
  • \(\rightarrow\) Classic principal-agent problem
  • \(\rightarrow\) Owners granted captains full authority: corporal punishment, control of rations and pay
• But autocracy created a new problem: captain predation
  • Captains could cut rations, withhold pay, abuse crew members
  • Sailors had little legal recourse once at sea
  • But any rebellion against the captain would be punished by the state once back at land

The pirate solution: democracy on the high seas

• Pirates owned their own ships: the crew were the owners
  • \(\rightarrow\) The PA problem is reversed: how do you constrain the captain, not the crew?
• Separation of powers:
  • Captain elected for battle only; quartermaster controls loot distribution and discipline
  • \(\rightarrow\) No single person controls both violence and resources
• Pirate articles:
  • Rules agreed to by the whole crew before setting sail
  • Covered: shares of loot, compensation for injuries, rules of conduct, punishments
  • When articles didn’t cover a situation, the crew acted as a judiciary
• Share system:
  • Pay tied to collective plunder, not fixed wages
  • Aligns everyone’s incentives: lazy crew members hurt everyone’s share
  • \(\rightarrow\) Peer monitoring replaces top-down monitoring (walk the plank!)

Think-pair-share: wrapping up organization of OC

• What problems do the pirate institutions solve? And through which mechanism?
  • Separation of powers \(\rightarrow\) ?
  • Pirate articles \(\rightarrow\) ?
  • Share system \(\rightarrow\) ?
• Why did pirates need to constrain their captain while merchants needed to empower theirs?
  • What does this tell us about how who owns the ship shapes how it is run?
  • Other OC cases where ownership structure shapes how power is distributed?
• Pirates and the gangs both solved organizational problems without law
  • What did they have in common? What was different?

For Monday: protection rackets and the Sicilian mafia

• We have now completed part I of the course, which introduces foundational concepts
  • Definitions, the state-crime nexus, origins, and internal organization
• Case studies begin on Monday
  • We zoom in on specific types of criminal organizations
• Don’t forget to fill out the survey if you need help finding a group for the final project
• Any questions before the quiz?