The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime

Abstract

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

Entrepreneurship and second-best institutions: going beyond Baumol’s typology

“…Bandiera (2003) discusses how the Sicilian Mafia thrived in a situation where the old feudal system was reformed and landholdings redistributed to the private sector without the concomitant creation of public institutions for law enforcement. In a similar vein, Milhaupt and West (2000) argue that organized crime in Japan is a natural response to inefficient institutions. Organized crime is, in their words, "an entrepreneurial response to inefficiencies in the property rights and enforcement framework supplied by the state" (ibid., p. 43).…”

“…14 A protective service provided by the Mafia is an example of the first kind of entrepreneurship (enhancing the workings of beneficial, but poorly implemented, institutions). As shown by Bandiera (2003) and Milhaupt and West (2000), such services can stabilize and make the environment of productive activities more predictable when the State is incapable of upholding law and order. The Mafia is then in possession of the unique resource of being able to provide protection of private property.…”

Nuclear Power and the Mob: Extortion and Social Capital in Japan

“…The Japanese mob supplies some services that unwind dysfunctional government policy. Curtis Milhaupt and Mark West (2000) nicely identify several. Where tenant protection law stops developers from evicting tenants, for instance, the mob helps them For years, observers studiously avoided mentioning the tie between the mob and the underclass.…”

Evasive Entrepreneurship and Institutional Change

“…In the extreme case, even outright illegal evasive activities, for example, activities by the Mafia, may have a welfare-improving element to them. Under unstable institutional circumstances, organized crime can provide a measure of stability and predictability that enables agents to undertake productive economic activities (Bandiera 2003;Milhaupt and West 2000;Sutter et al 2013). As Milhaupt and West (2000, p. 43) argue, this result is "an entrepreneurial response to inefficiencies in the property rights and enforcement framework supplied by the state" (cf., Boettke and Leeson 2009, p. 255).…”