Search results for " Principal-Agent Theory"
showing 2 items of 2 documents
Extortion, firm's size and the sectoral allocation of capital
2014
Extortion of firms is a typical activity of organized crime such as Mafia. We develop a simple principal-agent model to find the Mafia-optimal extortion as a function of firm’s observable characteristics, specifically firm’s size. We test the predictions of the model on a unique dataset on extortion in Sicily, the Italian region where Mafia is most active. Our empirical findings show that i) extortion moderately increases with firm’s size ii) extortion is regressive, the average extortion rate ranging from approximately 40% of operating profits for small firms to 2% for large firms iii) extortion turns average cost function decreasing, therefore influencing market competition
The Economics of Extortion: Theory and Evidence on the Sicilian Mafia
2019
This paper studies extortion of firms operating in legal sectors by a profit-maximizing criminal organization. We develop a simple principal-agent model under asymmetric information to find the Mafia-optimal extortion as a function of firms' observable characteristics, namely size and sector. We test the predictions of the model on a unique dataset on extortion in Sicily, the Italian region where the most powerful criminal organization, the Mafia, operates. In line with our theoretical model, our empirical findings show that extortion is strongly concave in firm's size and highly regressive. The percentage of profits appropriated by Mafia ranges from 40% for small firms to 2% for large firm…