Loyalty Incentives in Criminal Organizations

Abstract: Even among themselves, criminals are not seen as trustworthy. However, criminal organizations can use violence to keep criminals loyal. However, such violence is costly if the police investigates. In this paper we study how the choice of loyalty incentives by a criminal organization affects the amount of organized crime and independent crime. Moreover, we study what this implies for optimal police priorities regarding intra-gang violence. We consider an indefinitely repeated labor market, where 'peripheral crime' can be a stepping stone towards organized crime. We study which incentives the organization will provide to its members. If punishment is either not credible or not sufficient, then the boss needs to reward loyalty. This has three effects. First, organized crime is lower because hiring criminals is more costly. Second, peripheral crime tends to increase because peripheral criminals hope to be recruited. Third, organized criminals are relatively well off, while peripheral criminals have to scrape by. The police may raise the costs of punishments. This can only be beneficial if it affects the credibility of punishment, which (i) is not always possible, depending on which resources are reallocated, but (ii) can reduce organized crime, albeit typically at the expense of more peripheral crime.