This Article provides theoretical and empirical support for the claim that organized crime competes with the state to provide property rights enforcement and protection services. Drawing on extensive data from Japan, this Article shows tha4 like firms in regulated environments everywhere, the structure and activities of organized criminal firms are significantly shaped by statesupplied institutions Carefid observation reveals that in Japan, the activities of organized criminal firms closely track inefficiencies in formal legal structures, including both inefficient substantive laws and a state-induced shortage of legal professionals and other rights-enforcement agents. Thus organized crime in Japan-and, by extension, in other countries where significant gaps exist between formal property rights structures and state enforcement capacities-is the dark side of private ordering. Regression analyses show negative correlations between membership in Japanese organized criminal firms and (a) civil cases, (b) bankruptcies (c) reported crimes, and (d) loans outstanding. Professors Milhaupt and West interpret these data to support considerable anecdotal evidence that members of organized criminal firms in Japan play an active entrepreneurial role in substituting for state-supplied enforcement mechanisms and other public services in such areas as dispute mediation, bankruptcy and debt collection, (unorganized) crime control, and finance They offer additional empirical evidence indicating that arrests of gang members do not curb the growth of organized criminal firm Their findings may have a significant normative implication for transition economies: efforts to eradicate organized crime should focus on the alteration of institutional incentive structures and the stimulation of competing rights-enforcement agents rather than on traditional crime-control activities Organized crime is flourishing. It thrives in transition economies, it persists in developed nations; it prospers under globalization. Criminal groups may control 40 percent of the Russian economy, for example.! In Japan, the influence of organized crime extends from prostitution to golf course development, from banking and securities
An earlier draft of this Article was written as a background report for the Worldbank, WORLD DEVELOPMENT REPORT 2002: BUILDING INSTrrUTIONS FOR MARKErs (2001). Financial support from the World Bank is gratefully acknowledged.
Innovation in corporate law In most countries large business enterprises today are organized as corporations. The corporation with its key attributes of independent personality, limited liability and free tradeability of shares has played a key role in most developed market economies since the 19th century and has made major inroads in emerging markets. We suggest that the resilience of the corporate form is a function of the adaptability of the legal framework to a changing environment. We analyze a country's capacity to innovate using the rate of statutory legal change, the flexibility of corporate law, and institutional change as indicators. Our findings suggest that origin countries are more innovative than transplant countries.
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