BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 30/2008:
Optimal Law Enforcement and Welfare in the Presence of Organized Crime
Jenni Pääkkönen ()
Abstract: This paper explores the optimal law enforcement strategy
of a Leviathan government in the presence of organized crime. The
government is considered too weak to prevent an upsurge in crime, so it
allows the mafia to generate a positive payoff by extracting rents in the
shadow economy. From a strategic standpoint, the government, if it has the
possibility to monitor shadow production and fine offenders, may not want
to shut down illegal production or kick out the mafia, but instead can use
its policing activity to capture additional revenue through fines on
illegal firm activities and an increased tax base when mafia-harassed firms
return to the legal sector. The option of escaping into the shadow economy
can benefit some firms, even when this utility is diluted by the presence
of a mafia. Monitoring hurts both legal and illegal firms, while the
government benefits.
Keywords: organized crime; shadow economy; taxation; (follow links to similar papers)
JEL-Codes: H26; H41; K42; (follow links to similar papers)
33 pages, December 22, 2008
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