Cost Of Organized Crime

Organized Crime is existent in virtually all nations across the globe. The phenomena of organised crime is particularly pervasive in Italy and therefore, to most accurately model the economic rigorousity present in organized criminal markets, Italy will prove the best testing ground to analyse how an economist can aid the judiciary system and society in tackling the issue. Italy has been reported to have costs related to organized crime of '116bn a year, equivalent to 7.7% of GDP.
Organized Criminal groups are referred to as mafias in Italian legal and public discourse. The distinct and omnipresent role that mafias have held in Italy is evident by the echelons of governance they have managed to infiltrate, with a Sicilian court calling Italy's then president, Giorgio Napolitano, to testify in an investigation into alleged secret talks between the mafia and the state in the wake of deadly bombings in the 1990s (Reuters 2013). Recent holistic investigations into the nature of organized crime groups has only aided the economists' inherent skills in tackling the issue, as 'Economic power is of paramount relevance to Mafia-type organisations' . As economists, we hold no comparative advantage in the area of ethical reflection so must rely on our tools of rationalising preferences and choices. Our ability to model rational choice and agency decisions can be implemented here to analyse the behaviours of illegal activities'if we resign the roles of personal pathologies and deviations to the subsequent sociological studies. The criminal framework in modern day Italy consists mainly of four groups; the Sicilian mafia or Cosa Nostra; Neopolitan Camorra; Calabrian 'Ndrangheta; the Apulian Sacra Corona Unita . Of most benefit to the subsequent examination, is the mafia group known as the 'Ndrangheta'regarded to be the most powerful organised crime group at a global level.
In Becker's seminal paper'where this field of study can be attributed to have its origin with respect to the economic perspective'an agent decides whether to commit crime, and how much crime to commit, by comparing the benefits and costs of crime with those of legitimate employment activities. So the probability and magnitude of punishment should be able to affect the level of crime (for which, we will investigate). The proceeding analysis will prove the Beckerian result that, the optimal fine will be the maximal fine when a criminal is successfully detected. For the aforementioned result to be derived at there needs to be a clarification of the term 'Organized crime' that itself is a distinct phenomena from crime on an individual basis, and therefore, the implications of organized crime on society, in terms of the organisations dynamic with the government and on the market in which they operate.

Formalising the definition of Organised Crime
The term 'organised crime' consists of two words that to a certain extent contradict each other. On the one hand, a 'crime; is by definition an illegal act that usually, but by no means always goes against societies norms and mores. Criminal acts and the persons committing them are relegated to the 'margins of the polity and the state and they are considered aberration, exception to the rule, something random. On the other hand, the adjective 'organised' means 'having a formal organisation to coordinate and carry out activities' (Skaperdas, 1995: p.61)'. behaviours such as Murder, Robbery, and Theft-behaviours Finckenauer rightfully states as mala in se, or wrong in and of themselves'are well defined and accepted as crimes. Other behaviours then such as drug dealing, bribery, and gambling'behaviours that are mala prohibita, or wrong because they are prohibited'are less clearly defined but are also generally accepted as being crimes. All of these and other crimes as well, have come to be associated with and a part of what is commonly thought of as being organised crime. A list of crimes does not, however, define what is organised crime'the reason being that these crimes can be committed by perpetrators acting entirely alone (Finckenauer, 2005). If we attempt to elicit a potential framework in which we were successfully able to illustrate characteristics unique to organised crime, it will successfully serve to support law enforcement agencies in the strategies they may implement into tackling organised crime. Mafias should exhibit the following dimensions (1) Ideology (or lack thereof), (2) structure/organized hierarchy, (3) continuity, (4) violence/use of force or threat of force, (5) illegal enterprises (6) penetration of legitimate businesses, and (7) corruption.

Adapting the Beckerian Model
Individuals will rationally decide whether to engage in criminal activities by comparing the expected returns to crime with the returns to legitimate industries. Therefore it is not overambitious for our analysis to assume that criminal gains become less attractive if the government increases its probability (certainty) and severity of punishment. So criminal gains have diminishing returns with respect to punishment. Becker's main thesis is that, if we are able to costlessly impose a fine, this fine should be equal to an individual's entire wealth and be necessarily complemented by an optimal probability of punishment'which in tandem would deter criminal pursuits. (Fiorentini, 1995) specifies the main channels in which traditional deterrence policies take against organized crime, we will focus on deterrence strategies based on investment in investigative activities and in the judicial and penal systems in order to increase the probability of detection of crimes related to the criminal organisations' activities. The Economic literature to date has stressed welfare effects of mafias in the context of varying market structures. Given in the output market, irrespective of market structure, what is supplied is universally accepted as being 'bad' goods'we observe that imperfectly competitive markets are more optimal for society in the presence of 'bads' than that of perfectly competitive markets. As essentially the supply of these goods is smaller (effectively restricted) under monopolistic markets than that of competitive ones. We will model a criminal organization as having a principal of a vertically integrated structure where agents act as individual criminal firms. (Need to add a real-world example to prove the integrated structure I said). With the very important characteristic in the market for crime being that there is a dominant firm who is extracting economic surplus from these smaller criminal firms (who themselves are agents). For completeness, we deduce the optimal deterrence policies of the government when there is a competitive criminal market. Such that all agents are in themselves criminal firms . The research at hand will heavily utilise Garoupa's extension on the Beckerian economic model of crime (EMC).
Risk-neutral individuals when choosing to commit a criminal act, will receive a benefit b and this results in a social harm to the value of h. Informational asymmetry in the market is such that the policymaker does not know any individuals' b, but does know the distribution of agents by type which can be described as a uniform distribution with support [0,1] and a cumulative distribution b. We will postulate therefore that h>1 to adequately capture the empirical understanding that crime is damaging to an economy so therefore, criminal offenses are not socially beneficial.
The government therefore it is assumed can choose a punishment f, and a probability of detection and conviction, p. As we are concerned with deterrence strategies that invest in investigative activities'the expenditure to necessarily induce probability p is given by cp, where c is itself a cost parameter such that c>0. The objective function to be maximized is the sum of individuals' benefits minus the harm caused by their respective acts and enforcement costs. In this environment the maximum feasible punishment will be a fine F, which will be interpreted as the maximum wealth of individuals.
Through conventional utility theory we can easily postulate that a risk-neutral individual commits a crime if utility of an illegal act (U(I)) minus the disutility of committing an illegal act (V(I)) will be greater than or equal to zero:
U(I)=b and V(I)=pf,such that U(I)-V(I)'0
This will demonstrate that an agent can be induced to commit an illegal act if his total utility from doing so is nonnegative. Therefore an individual commits an offense when b'pf. Social utility therefore will be:
W='_pf^1'(b-h)db 'cp
The government will maximize the welfare function in parameters p and f, i.e., the probability and severity of punishment subject to 0'f'F. In this competitive environment we would expect that the optimal fine is indeed the maximal fine so that Becker's result holds, and that some underdeterrence is optimal. We can arrive at these results through Lagrangean methods of the government's welfare function. We shall define the Lagrangean as L=W+??(F-f). The optimal f^* and p^*must satisfy (see appendices)
(2)' L'_p=f(h-pf)-c=0

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