Organized criminal activities have been regarded as major economic and social issues since the early 1900s. Although there has been, as pointed out by Fiorentini and Peltzman (1995), enormous research interest in the economics of criminal activities, economists have done relatively little work on issues specifically related to the economics of organized crime. We only see that much of the work has been done by following Becker's (1968) framework where the target is the individual agent's allocative choice between legal and illegal activities in the face of different deterrence arrangements. Among the few exceptions, a criminal organization is often thought of as a monopolistic firm, and the theory of monopoly is predominantly used to analyze organized crimes. Schelling (1967), Buchanan (1973), Backhaus (1979), Gambetta and Reuter (1995), and more recently Garoupa (2000) investigate the optimal public policy toward organized crimes through a welfare comparison between a monopoly (organized criminals) and competitive supplies (individual criminals). Given that criminal activities are seen as "social bads," the monopolistic market is considered to be better than a perfectly competitive one, because its "output of crime" is smaller. (1)
The monopolistic model implies that potential offenders have no other criminal choices but are forced to join the criminal organization if they decide to commit a crime. Clearly, it is less than exhaustive in terms of describing agents' choices in relation to criminal behavior. In fact, the criminal organization may not be monopolistic after all, as argued by Dick (1995) and others. (2) Criminologists Johnson (1962), Rubin (1973), and Reiss (1986) observe that most criminal organizations are endemic in some particular areas and/or restrictive in some particular illegal businesses. These criminal activities, such as bootlegging, drug dealing, pimping, and prostitution, are often less organized and would be difficult to successfully monopolize. Dick (1995) also points out that prostitution, smuggling, fencing, and narcotics importation often involve substantial competition among downstream suppliers and can hardly be regarded as monopolistic businesses. In other similar studies, Klein and Crawford (1967), Morash (1983), and Sarnecki (1986) conclude that most youths who engage in delinquency are at most street gangsters and cannot be seen as members of a highly structured organization.
In reality, the determination of the market structure for crime should be endogenous, which has notable implications for the optimal crime enforcement policies and crime itself. To recover the conventionally neglected facts and provide a more complete picture regarding organized crime, this article develops a simple but more general model. In this framework, individual and organized crimes are coexisting alternatives to a potential offender, and joining a criminal organization is seen as only one of the agent's rational choices. In deciding whether to join a criminal organization, the methods used to allocate the criminal organization's payoffs and the extra benefits provided by the criminal organization are given serious consideration. They both play crucial roles in determining the sizes of the criminal organizations as well as in influencing the interactive relationship between the market structure for crime and the government's optimal law enforcement.
This study contributes to the existing literature and provides new insights in three respects. First of all, by allowing the agent to choose rationally between engaging in individual or organized crime, we not only endogenize the size of the criminal organization but also explore the factors that determine the type (high or low criminal ability) of offenders that enter the criminal organization. A new theoretical attempt is made in terms of providing an explanation to the observation of Anderson (1995): There are considerable variations in personal qualities and values across different criminal organizations. …