PAYMENT, PROTECTION AND PUNISHMENT

Abstract

A game theoretic model is used to examine the dynamics governing repeated interaction between Mafiosi running extortion rackets and entrepreneurs operating fixed establishments. We characterize the conditions under which violence occurs. Entrepreneurs pay protection money to the Mafia because they fear the Mafia's ability to punish. However, the entrepreneurs' willingness to pay encourages opportunistic criminals (fakers) to use the Mafia's reputation and also demand money. We show that two phenomena drive the repeated interaction between criminals and entrepreneurs: reputation-building and readiness to use violence on the part of the Mafiosi, and attempts to filter out fakers on the part of entrepreneurs. These two phenomena lead to turbulence: as entrepreneurs filter out fakers by not paying some of the times, some real Mafiosi are not paid and punish non-payment to establish their reputation. As Mafia reputation is re-established, fakers have again an incentive to emerge, setting in motion a spiral of never-ending filtering and violence. We also show how external shocks to this relationship, such as changes in policing practices, succession disputes within the Mafia or inflation, often lead to violence until beliefs are re-established. We conclude that a world where mafias operate is inherently turbulent. This conclusion goes against the widespread perception that racketeers are able to perfectly enforce territorial monopolies.