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Organized Crime, Corruption, and Punishment

May 2004
Stanford King Center on Global Development Working Paper
We analyze an oligopoly model in which differentiated criminal organizations globally compete on criminal activities and engage in local corruption to avoid punishment. When law enforcers are sufficiently well paid, difficult to bribe, and corruption detection highly probable, we show that increasing policing or sanctions effectively deters crime. However, when bribing costs are low, that is, badly paid and dishonest law enforcers work in a weak governance environment, and the rents from criminal activity relative to legal activity are sufficiently high, we find that increasing policing and sanctions can generate higher crime rates. In particular, the relationship between the traditional instruments of deterrence, namely intensification of policing and sanctions, and the crime rate is non-monotonic. Beyond a threshold, further increases in intended expected punishment create incentives for organized crime extending corruption rings, and ensuing impunity results in a fall of actual expected punishment that yields more rather than less crime.